The U.S. stock market responded favorably to the Federal Reserve's decision to maintain the benchmark interest rate within the 5.25% to 5.5% target range. In the following press conference, Federal Reserve chair Jerome Powell also suggested the possibility of the central bank concluding the interest rate hike cycle. Furthermore, a weaker-than-expected October jobs report reduces the probability of the Fed increasing interest rates in the coming months.
All this has led to the benchmark S&P 500 gaining 5.8% last week and closing at 4,358.33 points -- the best weekly advance in 2023. As overall investor sentiment improves, the possibility of an upcoming bull market also increased dramatically. Hence, it makes sense for retail investors to start picking small stakes in attractive growth stocks.
If you have $500 that is not needed to pay bills or for other contingencies, investing it in companies like Palantir Technologies (PLTR 3.73%) and DigitalOcean (DOCN 3.30%) can prove to be a smart investment move.
1. Palantir Technologies
Artificial intelligence (AI)-powered data mining and analytics company Palantir's third-quarter earnings performance (ending September 30) was quite impressive, with revenues and earnings surpassing consensus estimates. The company posted a generally accepted accounting principles (GAAP) profit of $72 million in the third quarter, a dramatic improvement from a loss of $124 million in the same quarter of the prior year -- and the fourth consecutive quarter of GAAP profitability.
While Palantir grappled with challenges associated with the uncertain timing of government contracts in the past year, things seem to have taken a turn for the better.
In the third quarter, the company's government business revenue rose by 12% year over year to $308 million, driven by rapid demand for its software products in the current geopolitical landscape. With global defense IT spending expected to grow from $82.1 billion in 2020 to $110.9 billion in 2027, Palantir just scratched the surface of this huge market. Furthermore, in September 2023, the company launched Palantir Government Web Services for defense industrial companies to rapidly scale and operationalize their mission-critical capabilities.
Meanwhile, to reduce its overreliance on the government sector, Palantir is also expanding its commercial customer base. In the third quarter, the company's commercial customer count soared by 34% year over year to 453 customers, while its commercial revenues were up by 23% year over year to $251 million.
The company's commercial business benefited significantly from the increasing adoption of its Artificial Intelligence Platform (AIP) by existing and new customers. By integrating AI and large language model (LLM) capabilities in its core software, Palantir is helping clients in informed decision-making. Currently, more than 300 organizations adopted AIP.
Palantir trades at a price-to-sales multiple (P/S) of 19.5, which is far higher than the software industry median multiple of 2.1. However, considering the solid tailwinds in the government sector, rapid adoption of AIP, and improving financials, the stock may prove to be a smart pick even at the current elevated valuation levels.
2. DigitalOcean
In the cloud computing market dominated by technology stalwarts such as Alphabet, Amazon, and Microsoft, which mainly focus on large enterprise clients, DigitalOcean has managed to differentiate itself by offering simple, lower-priced cloud-native infrastructure and platform tools tailored to the needs of developers, start-ups, and small and medium businesses with less than 500 employees.
By helping small businesses easily set up and run their software infrastructure on the cloud, the company has successfully targeted an underserved market segment. The company also provides round-the-clock customer and technical support -- paramount for small customers to effectively handle their cloud applications.
DigitalOcean has also been introducing several new services to strengthen its core offerings. To that effect, the company introduced Managed Kafka as a service offering, a distributed streaming platform for small and medium-sized business customers that have significant data streaming requirements. The company also introduced premium features for improving CPU, memory, and storage, as well as scalable storage for certain databases (PostgreSQL and MySQL). Additionally, the acquisition of Paperspace will strengthen the company's capabilities of building, deploying, and scaling AI applications on the cloud.
For the past year, DigitalOcean has been grappling with a range of challenges, including the impact of customers optimizing IT spending, competitive pressures, and a highly leveraged balance sheet. However, the company demonstrated a remarkable turnaround in the third quarter (ending September 30), with revenues of $177 million surpassing the consensus estimate of $173.3 million. The company is profitable and has positive free cash flow.
The cloud computing market opportunity for individuals and companies with less than 500 employees is expected to grow from $98 billion in 2023 to $195 billion in 2026. With a current annual run rate of just $675 million (a very small percentage of the total market) and strong brand positioning in this market, there is still significant runway ahead for the company.
