In the last decade, growth investing has trounced both value and income investing, posting outsized returns. As a result, many high-growth stocks began to command excessive valuations. However, the tide is slowly starting to turn.
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For the first time in years, the S&P 500 is tracking the performance of the Nasdaq. Both have posted similar returns year-to-date (~25%) as many high-flying tech stocks see their valuations reset. One example of a tech stock struggling to maintain any sort of momentum is Palantir Technologies (PLTR).
Down approximately 12% year to date, I remain bullish on Palantir’s long-term prospects. (See Analysts’ Top Stocks on TipRanks)
Palantir Technologies provides organizations with solutions to manage large disparate data sets in an attempt to gain insight and drive operational outcomes. Palantir generates most of its revenue from government intelligence and defense sectors.
However, it has made a big push into various commercial markets with its Foundry software platform in recent years. Commercial operations accounted for 44.4% of total revenue in its most recent quarter.
Flat Performance
It’s been just over a year since Palantir IPO’ed to significant fanfare last September. While the company is up roughly 125% since then, investors are likely growing frustrated with the stock. The truth is, most of the gains on Palantir occurred in the first couple of months post-IPO.
Outside of a few bursts to the upside, the company has been unable to sustain any upwards momentum. Over the past six months, it has had three pushes above $25 per share, but it has retraced back to the $21 level each time.
Third Quarter Results
Earlier this month, the company posted strong quarterly results. Earnings of $0.04 per share were in line with expectations, while revenue of $392 million beat by $5.54 million. Revenue grew by a healthy 35.5% over Q3 of Fiscal Year 2020.
Palantir maintained this impressive growth by adding 34 net new customers and closing 54 deals with values north of $1 million.
The company expects to exit Fiscal Year 2021 with revenue of $1.527 billion, representing 40% growth year-over-year. This is also higher than the $1.51 billion consensus from analysts.
Palantir also raised its free cash flow guidance. Management now expects to achieve north of $400M in FCF, up from $300M+ previously. In addition, it also re-iterated long-term guidance for 30%+ annual revenue growth through 2025.
A Double-Digit Dip Is an Overreaction
So why did the stock drop by more than 20% post-earnings? Well, for starters, the markets are acting quite irrationally. We are seeing unjustified double-digit declines in many big tech names.
The global supply chain issues, inflation, and threat of rising rates are spooking investors. Given this, I suspect many are locking in profits in anticipation of a difficult winter. However, this is short-term thinking. Palantir is well-positioned to reward investors for years to come.
Increasingly, the world is reliant on data, and companies like Palantir play a critical role in helping companies leverage these assets. As an asset, data is becoming increasingly valuable as technology evolves.
Leaving profitability aside, paying 28 times sales for a company that is growing its top line at a 30% clip is quite reasonable, especially when considering that this growth is likely to be maintained over the next five years.
Wall Street’s Take
Turning to Wall Street, Palantir has a Moderate Sell consensus rating, based on one Buy, three Holds, and four Sells assigned in the past three months. The average Palantir price target of $23.14 implies 12.1% upside potential.
Disclosure: At the time of publication, Mat Litalien did not have a position in any of the securities mentioned in this article.
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