Aggressive Investors Want to Check Out This Beaten-Down Tech Stock

It’s been a while since I last thought about Palantir Technologies (PLTR). Like a lot of tech stocks, it’s gotten crushed in 2022. Its stock is down 62% year-to-date and nearly 74% over the past 52 weeks. 

Like many stocks losing money, investors don’t have the stomach for owning risk-on investments right now. The company’s Q3 2022 report is evidence of this reality. 

Palantir reported its Q3 2022 results on Nov. 7 before the markets opened. While the report was mixed, investors did not like the slight earnings miss. Its shares lost more than 11% on the news.

The data analytics software company’s shares appear at or near the bottom if you're an aggressive investor. It’s not the stock for anyone who’s risk averse, but if you don’t mind volatility, it could be one of your biggest winners in 2023. 

Here’s why I feel this way. 

The Balance Sheet Is Solid

Before I get into the negatives of owning PLTR, I thought I’d cover some of its finer points. 

As CEO Alex Karp wrote in its Q3 2022 shareholder letter, Palantir finished the quarter with $2.4 billion cash on its balance sheet and zero debt. In a market like this one, that’s an excellent place to be. 

That’s cash per share of $1.16 based on 2.06 billion shares outstanding. As I write this, its current share price of $7.04 trades for 6.1x cash. Microsoft (MSFT), by comparison, trades at 160.4x cash.

I’m not suggesting that Palantir is in the same league as Microsoft; it has to earn an annual GAAP profit before discussing its future greatness.

However, as Palantir pointed out in its press release, it generated $37 million in adjusted free cash flow (AFCF) in the third quarter, its eighth consecutive quarter of positive AFCF. In fact, in the trailing 12 months through Sept. 30, its AFCF was $231 million, or 13% of its revenue. 

In addition to its $2.4 billion in cash, it has a nearly $1 billion credit facility that’s undrawn, giving it close to $3.4 billion in liquidity. 

That’s not bad for a company that still has $1.3 billion in remaining performance obligations.

A 1-Cent Miss Is Not Worth an 11% Drop in the Share Price

Palantir generated $478 million in revenue in the third quarter, eight million better than the consensus estimate while missing on the bottom line with adjusted earnings per share of a penny, one-cent less than analyst expectations.

First of all, only 10 analysts are covering PLTR stock. If there were 40, a penny miss on the average estimate might be a problem. Further, the company is still growing. Maybe not at the breakneck speed some would like, but it still grew revenues by 22% YOY in Q3. 

Even better, its U.S. commercial revenue grew 53% in the third quarter, with a 124% increase in customers. Overall, its U.S. revenue -- commercial and government -- now accounts for 62% of its revenue, up from 58% a year earlier.   

Karp had this to say about its business in his shareholder letter:

“The sustained increase in interest and orders for our software products, particularly in the United States, comes not in spite but because of the current moment of austerity and tightening credit conditions,” Karp wrote.

“The metaverse and other idiosyncratic pursuits of the technocratic elite may be luxury goods. But foundational data platforms are not.­­­”

Palantir’s shareholder letter highlighted its customer count between Q3 2019 and Q3 2022. The chart says everything about its business getting stronger. In Q3 2020, it added 12 new customers. A year later, it added 61. This year it added 134 or more than double last year’s strong showing.

If that doesn’t suggest customer acceptance, nothing does.

Where to From Here?

Buying stocks of any pedigree right now is difficult. There’s no question investors are less than confident about the economy's direction. The tech industry is especially vulnerable.

Twitter (mostly Elon Musk) fired approximately half of its 7,500 employees. While it’s expected to rehire some of those laid off by “mistake,” a large number of people won’t have a paycheck.  

According to a Nov. 4 article from Crunchbase, more than 52,000 tech workers had been laid off in 2022 through late October. That figure doesn’t include the Twitter cuts. Other new layoff announcements include Stripe (1,050), Lyft (760), Opendoor (550), and more.

Tech is no longer a sure bet as companies recalibrate their human resource needs to account for a slowing economy. For sure, there are better near-term sectors to bet on. 

Long-term, however, Palantir remains an intriguing company. 

“The speed with which our platforms are being adopted by new customers and the ease with which such platforms are being deployed is a reflection not only of the further maturation of the software itself but of its essential nature to modern life,” Karp stated in Palantir’s shareholder letter.

If Palantir hasn’t bottomed, it’s very close. Risk-takers ought to look more closely at this beaten-down stock. 

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