While macroeconomic challenges have harmed the software sector, its long-term prospects look bright. However, I think it could be wise to wait for a better entry point in Palantir Technologies Inc. (PLTR) and UiPath Inc. (PATH) for reasons discussed throughout this article.
Before discussing the fundamentals of these stocks in detail, let’s see what’s driving the prospects software industry.
According to Statista, software market revenue is expected to hit $698 billion this year. Moreover, the sector’s revenue is expected to grow at a 5.3% CAGR over the next four years to $858.10 billion by 2028. The global SaaS market is expected to grow to $908.21 billion by 2030 at a CAGR of 18.7%.
However, the software industry has experienced a significant challenges in recent years as a result of greater competition, economic uncertainty, and shifting consumer preferences. Despite these hurdles, the sector continues to develop and adapt to remain relevant and satisfy the changing demands of businesses and customers.
Also, according to Layoffs.fyi, a website that analyzes layoffs in the technology industry, 1,183 companies laid off workers in 2023 as of January 2, 2024. A total of 261,997 IT workers have lost their jobs since the beginning of 2023, compared to 164,969 in 2022. The number of layoffs by companies in 2023 also surpassed 2022, when 1,061 tech companies laid off workers – a figure more than that of 2020 and 2021 combined.
The widespread disruption and uncertainty have led many companies to implement cost-cutting measures, including layoffs, to sustain their operations.
Let’s delve into the fundamentals of the featured stocks.
Palantir Technologies Inc. (PLTR)
PLTR constructs and deploys software platforms tailored for the intelligence community, aiding counterterrorism investigations and operations. Its flagship product, Palantir Gotham, empowers users to uncover concealed patterns in datasets, facilitating strategic planning and real-world responses to identified threats within the platform.
PLTR’s forward EV/Sales of 14.33x is 400.8% higher than the industry average of 2.86x, however its forward non-GAAP PEG of 0.90x is 54.2% lower than the industry average of 1.96x.
PLTR’s trailing-12-month ROTA of 3.51% is 633.1% higher than the industry average of 0.48%. However, its trailing-12-month ROTC of 0.74% is 73.6% higher than the industry average of 2.80%.
PLTR’s adjusted income from operations increased 101% year-over-year to $163.27 million for the third quarter that ended September 30, 2023. Its adjusted EBITDA grew 97.2% from the year-ago value to $171.94 million.
In addition, adjusted net income attributable to common stockholders stood at $155.02 million, up 864.3% year-over-year, whereas adjusted EPS increased 600% from the prior year’s period to $0.07.
However, the company reported total current liabilities of $688.93 million as of September 30, 2023, compared to total current liabilities of $587.94 million as of December 31, 2022.
The consensus revenue estimate of $2.66 billion for the year ending December 2024 represents a 19.7% increase year-over-year. Its EPS is expected to grow at 18.7% year-over-year to $0.29 for the same period. It surpassed EPS estimates in three of four trailing quarters. PLTR’s shares have gained 152.9% over the past year to close the last trading session at $15.98. However, the stock has lost 12.7% over past month.
PLTR’s POWR Ratings reflect this uncertain outlook. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
PLTR also has a C grade for Growth and Momentum. It is ranked #19 out of 21 stocks in the Software - SAAS industry. Click here for the additional POWR Ratings for Value, Stability, Sentiment and Quality for PLTR.
UiPath Inc. (PATH)
PATH provides an end-to-end automation platform that offers a range of robotic process automation (RPA) solutions, mainly in the United States, Romania, and Japan. The company provides a suite of interrelated software to build, manage, run, and govern automation within the organization. It serves banking, healthcare, financial services, and government entities.
PATH’s forward EV/Sales of 8.60x is 200.4% higher than the industry average of 2.86x, however its forward non-GAAP PEG of 1.13x is 42.7% lower than the industry average of 1.96x.
PATH’s trailing-12-month levered FCF margin of 30.94% is 257.7% higher than the industry average of 8.65%. However, its trailing-12-month CAPEX / Sales of 0.48% is 79.9% lower than the industry average of 2.37%.
PATH’s total revenue for the fiscal third quarter (ended October 31, 2023) increased 24% year-over-year to $325.92 million, while its gross profit grew 25.5% from the prior-year quarter to $276 million. However, during the same period, the company’s net loss amounted to $31.54 million and $0.06 per share. In addition, its operating loss stood at $55.82 million.
Analysts expect PATH’s revenue to increase 21.4% year-over-year to $1.28 billion for the year ending January 2024. Its EPS is expected to grow 237.9% year-over-year to $0.47 for the same period. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 98.7% over the past year to close the last trading session at $22.61. However, the stock has lost 8.4% over past month.
It’s no surprise that PATH has an overall C rating, equating to a Neutral in our POWR Ratings system. It has a C grade for Sentiment and Momentum. It is ranked #13 in the same industry.
Beyond what is stated above, we’ve also rated PATH for Value, Growth, Stability and Quality. Get all PATH ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PLTR shares were trading at $16.73 per share on Monday morning, up $0.75 (+4.69%). Year-to-date, PLTR has declined -2.56%, versus a -0.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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