Tech Stocks Have Crashed: Buy Palantir?

Seeking Alpha2023-01-25

SummaryPalantir was once a high-flying tech angel trading at unrealistically high valuations.The reasons for the bubble made sense, as the company is arguably a leader in artificial intelligence.With ...

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JQC
2023-01-25
JQC
👌
T202311701
2023-01-25
T202311701
O
YauDK
2023-01-25
YauDK
Ye

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The enthusiasm has faded, with the stock crashing alongside a broader tech crash. It appears that the company hasnot proven immune to macro-headwinds, with management seemingly pulling back long-term guidance. That said, the company retains ample net cash on its balance sheet and continues to generate robust free cash flows. At current prices, one can buy PLTR from a promising long-term outlook without paying up for the hype.PLTR Stock PricePLTR came public to little fanfare but soon after soared as it got caught up amidst the pandemic bubble. The stock has since given up its gains and then some, as it is now trading around its $7.25 direct listing price.Data by YChartsI last covered PLTR in October, where I rated the stock a buy as it was trading at compelling valuations in spite of macro headwinds. The stock has fallen some more since then, helping to improve the value proposition even further.PLTR Stock Key MetricsThe latest quarter saw PLTR deliver revenue growth of 21.9% to $477.88 million. That beat guidance of $475 million but reflected a meaningful deceleration from the 26% growth delivered in the second quarter and the greater than 30% growth rate that investors may be more accustomed to. PLTR saw strong 26% growth in its government business, as its trailing-twelve-month government business revenue exceeded $1 billion for the first time.2022 Q3 PresentationIn contrast, its enterprise revenues grew by only 17%. While the customer count continued to grow rapidly, customers often take quite some time to ramp up spending as it takes time to fully utilize the product for their personalized use cases.2022 Q3 PresentationWithin that commercial segment, US commercial revenues grew by a robust 53%. That was not enough to pull up overall commercial revenue growth because it still made up only 18% of overall revenue. On the conference call, management noted that its international commerce business was roughly flat YOY as it was negatively affected by both macro conditions as well as the strengthening dollar.2022 Q3 PresentationPLTR generated a strong 119% net dollar retention rate in the quarter, in line with second quarter results.2022 Q3 PresentationOn an overall basis, PLTR grew its customer base by 66% YOY. Over time, as these customers use the product more and more, I expect the strong current customer growth to eventually lead to future accelerated revenue growth.2022 Q3 PresentationPLTR continued to generate non-GAAP operating profits, though margins compressed from 30% in the prior year to 17% in the latest quarter. Part of that margin contraction was attributed to more employees returning to work in the office as travel-related expenses increased. That 17% operating margin did beat management's guidance by 600 bps.2022 Q3 PresentationPLTR maintains a fortress balance sheet with $2.4 billion in net cash, and the company is still generating ample free cash flow.2022 Q3 PresentationLooking forward, PLTR reaffirmed guidance for up to $1.902 billion in revenue and $386 million of adjusted operating income for the full year. The fourth quarter is expected to see up to $505 million in revenue, representing just 16.6% YOY growth.2022 Q3 PresentationIs PLTR Stock A Buy, Sell, Or Hold?At one point, PLTR was trading at price to sales multiples well in excess of 30x. Those days are now long gone, with the stock now trading at under 8x sales. That is before accounting for the net cash making up 16% of the market cap.Seeking AlphaI should note that on the conference call, management made no reference or reaffirmation of its previous guidance for $4.5 billion of revenue by 2025. Incidentally, management had previously revised its guidance for 30% revenue growth through 2025 to that $4.5 billion target. While disappointing, it is understandable considering the uncertain macro conditions. I can see PLTR sustaining 30% net margins over the long term. Assuming 25% growth and a 1.5x price to earnings growth ratio ('PEG ratio'), I could see PLTR trading at 11.3x sales, representing a stock price of at least $10 per share. The upside is more pronounced when viewed upon longer time horizons, as I expect artificial intelligence to be a growth story that persists over the next decade and longer. The multiple expansion potential paired with the 20% to 30% annual growth can make PLTR a strong stock performer over the long term.What are the key risks? For starters, PLTR still commands some premium relative to tech peers as there are many tech stocks with 20% growth profiles trading at 4x to 5x sales. PLTR has historically sustained a premium, largely due to the attractive secular story and cash flow generation. This tech crash, however, has shown that such characteristics are not guarantees of sustained premiums. Another risk is that of competition. The bullish thesis relies on PLTR's ability to sustain robust growth rates over the long term (otherwise, how does one justify paying such a big premium relative to peers?). But artificial intelligence is a very popular secular theme, one that has attracted numerous competitors, including from the likes of the tech titans Microsoft (MSFT) and Alphabet (GOOGL). That risk combined with macro risk underscore the possibility that PLTR issues disappointing guidance for the next year - the stock is likely to remain volatile over the near term given the weak investor appetite for tech stocks. As discussed with subscribers to Best of Breed Growth Stocks, a wide basket of undervalued quality tech stocks may be a top strategy to take advantage of the tech stock crash. PLTR fits right into such a basket, offering high secular growth backed by positive cash flow generation and a reasonable valuation.This article is written by Julian Lin for reference only. 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