2022 was quite a disappointing year for the stock market, with U.S. equities posting their worst performance of the past decade. However, 2023 looks likely to end on a more promising note, especially after higher-than-expected real gross domestic product growth (a measure of inflation-adjusted economic activity) and lower-than-anticipated inflation in the third quarter.
In this improving macroeconomic environment, it makes sense for retail investors to opt for stocks of fundamentally strong companies riding secular tailwinds. In case you have $1,000 not required for paying bills or other contingencies, you could potentially generate solid returns by investing in growth stocks such as Palantir Technologies (PLTR 3.73%) and Confluent (CFLT 2.98%). Here's why.
Palantir Technologies
Long before the investment community became aware of the power of proprietary data, Palantir Technologies' software platform was helping U.S. military and intelligence agencies uncover trends and patterns in signal intelligence reports and confidential informant reports.
In fact, the company's breakthrough moment was when its software was credited for helping find the hideout of Osama Bin Laden. Since then, for the past eight years, the company has also extended the reach of its software platforms to analyze huge amounts of data and derive contextual insights for commercial customers and nonmilitary organizations.
Palantir has also been at the forefront of the ongoing AI revolution. Its recently launched Artificial Intelligence Platform (AIP) -- which combines the company's legacy machine learning technology with large language models (LLMs) -- has significantly enhanced the company's analytics capabilities. Many customers across industries have pointed to significant productivity gains in terms of time and speed with the use of AIP.
Notably, Palantir's AIP was used by nearly 300 organizations by the end of the third quarter -- almost triple the number of AIP users it had at the end of the second quarter.
In the past five months, Palantir has conducted several AIP Bootcamps allowing prospective customers to have hands-on experience with its AIP in solving real-time problems. This innovative go-to-market strategy is playing a pivotal role in improving unit economics for initial contact with prospective clients, reducing conversion time, and accelerating customer negotiations.
Unlike traditional pivot projects that require one to three months, AIP Bootcamps require five or fewer days to allow customers to get acquainted with the product. Furthermore, this strategy also allows the company to target multiple clients simultaneously and improve the productivity of the IT team. Palantir had planned to conduct AIP Bootcamps for nearly 140 organizations by the end of November 2023.
The company's financials currently do not reflect the complete impact of its AIP or new go-to-market strategy. Still, Palantir reported stellar numbers in Q3, with revenue and earnings handily beating consensus estimates. Notably, Q3 also marked the fourth consecutive quarter of profitability based on generally accepted accounting principles (GAAP).
Palantir is currently trading at a price-to-sales multiple of 20.7, far higher than the software industry median multiple of 2.1. While the rich valuation may deter some investors, considering the company's brand presence in the field of data analytics, the transformative potential of AIP software, and improving financials, its current valuation may actually prove conservative in the long run. This makes Palantir a solid stock to buy now.
Confluent
A leader in data streaming, Confluent reported solid performance in Q3, with revenue and earnings surpassing consensus estimates. Even so, the stock has taken a severe beating as investors are disappointed with the company's weaker-than-expected Q4 guidance. CEO Jay Kreps has highlighted several reasons for the slowdown in consumption of Confluent's services, including two customers who slowed spending due to company-specific reasons, geopolitical tensions in the Middle East, and a potential U.S. government shutdown.
However, there are still several reasons to like the stock.
First, despite the short-term macro headwinds, Confluent is currently targeting a massive $60 billion total addressable market. Previously, businesses would first collect and store data in physical servers and process it at a later date.
However, with the advent of advanced technologies such as autonomous driving, edge computing, the Internet of Things, and programmatic advertising, demand for processing real-time continuous data has been on the rise. In fact, according to International Data Corporation, 90% of the world's largest 1,000 companies will require data-streaming technology for real-time data processing by 2025.
To capitalize on this opportunity, Confluent has added several paid enterprise-grade features to the open-source data-streaming platform Apache Kafka. Confluent's upgraded cloud-native data-streaming platform is more scalable, easy to deploy and maintain, cost-effective, and more efficient for its clients.
Second, in January 2023, Confluent announced the acquisition of Immerok, a major contributor to Apache Flink, a technology used to build data-stream processing applications. By offering Confluent Cloud and Flink as a single solution, the company may attract even more customers.
Finally, although Confluent's Q4 guidance was disappointing, the long-term growth potential of the company is still intact. Confluent posted its first-ever, non-GAAP profits of $6.3 million in Q3, a dramatic improvement from a $38 million loss in the same quarter of the prior year. Confluent has guided for $768 million to $769 million of revenue for fiscal 2023, up 31% year over year at the midpoint. Furthermore, the company has forecast a reasonably healthy 22% year-over-year jump in revenue for fiscal 2024
Considering the huge addressable market opportunity, integration of Flink with Confluent Cloud, and healthy financials, Confluent seems to be an attractive pick now.
