The terms "big-data" and "digital transformation" are becoming a staple on the earnings calls of technology companies. There are a myriad of software tools that claim to possess the ability to integrate with other systems horizontally across an organization, synthesize loads of unstructured data, and use complex algorithms to derive actionable insights.

One such company is the ultra-secretive Palantir (PLTR -1.84%). Palantir was founded nearly two decades ago but has only been trading publicly since the end of 2020. Over the last couple of years, the company's CEO, Alex Karp, has certainly brought Palantir's name into more headlines.

While Palantir was historically known as a government contractor, the software giant has done an impressive job expanding into the private sector. Palantir's fourth-quarter 2022 earnings report contained several positive surprises, and now may be an opportune time to add its stock to your portfolio.

Palantir's growth story is intact

For the quarter and year ended Dec. 31, Palantir reported $509 million and $1.9 billion in revenue, respectively. These figures represented 18% and 24% year-over-year growth. Although these growth rates are impressive, it should be noted that Palantir missed its 30% annual growth target, which Karp has reiterated in the past on several occasions.

Despite the miss in its 30% top-line growth target, investors should not discount Palantir's accomplishments during 2022. Over the last several months, investors have heard top executives from Microsoft, Alphabet, and Amazon, among other Big Tech cohorts, all explain in detail that there are short-term cyclical challenges in the marketplace due to tightening corporate budgets, inflation, and fears of recession.

For this reason, many of these companies have resorted to layoffs in an effort preserve capital runway. It should be noted that following the earnings call, Palantir had its own layoffs, reducing headcount by approximately 2%. 

While layoffs are unfortunate, Palantir's earnings report contained one metric in particular that should have investors really excited. For the first time in company history, Palantir reported positive net income according to generally accepted accounting principles (GAAP). For the quarter ended Dec. 31, net income was $31 million, which equated to $0.01 earnings per share (EPS).

Perhaps even more exciting is that management is expecting positive net income for the entire 2023 calendar year, per the earnings report. 

It keeps getting better

Since Palantir's public debut, Wall Street skeptics have generally expressed concerns about it due to two factors: the company's reliance on large, lumpy government contracts, as well as high stock-based compensation packages.

Per the company's Q4 investor presentation, Palantir illustrated that while its U.S. government revenue grew 22% in 2022, its U.S. commercial revenue grew a whopping 67% to $335 million. Furthermore, total commercial revenue grew 29% to $834 million during 2022. By contrast, total revenue grew 19% annually to $1.1 billion. Investors can see that Palantir's private sector business is quickly approaching the same size of its legacy government segment in terms of absolute dollars.

In addition to the fast-growing commercial business, Palantir's stock-based compensation is also beginning to trend in the right direction. For the year ended Dec. 31, Palantir's total stock-based compensation was $565 million, compared to $778 million in 2021. When referencing stock-based compensation during the earnings call, CFO Dave Glazer stated:

This is a testament to our disciplined spending amid the macro uncertainty, as well as the normalization of our stock-based compensation expense overhang since becoming a public company. Stock-based compensation expense was down 38 million in the fourth quarter compared to the year-ago period and down 213 million compared to the year-ago period. As we look ahead to 2023, we will continue to exercise spend discipline across the company, pace hiring, while continuing to invest in high-priority areas, including in our product offerings, building out our go-to-market strategy, and technical roles.

Valuation is key

As of the time of this writing, Palantir has a market capitalization of $17 billion and trades at 8 times its trailing-12-month sales (P/S). Interestingly, the company's stock price has barely moved over the last six months. 

Despite its original 30% top-line growth rate being at risk, Palantir investors should be encouraged by the company's expense discipline and its ability to generate a profit during times of slowing economic growth. It is certainly possible that Palantir's long-term revenue growth rate may average out to 30% in the following years, but investors should normalize their expectations for 2023 in particular.

Even so, consistent profitability coupled with a fast-growing commercial business should not be discounted. For current shareholders, now is an opportune time to lower your cost basis. Moreover, for long-term investors, Palantir's current valuation is almost too good to pass up given the company's bullish outlook.