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Shopify has many growth levers, including serving more types of businesses and expanding internationally.
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Palantir is making high-priced deals that will boost revenue for years.
Following money manager Cathie Wood’s stock trades can be an entertaining activity for the individual investor, and it can also provide some inspiration. She seeks out disruptive technology stocks for her firm, Ark Invest, which manages multiple exchange-traded funds (ETF). While her risk appetite might be above many investors’, some of her funds have outperformed the market recently, and she was an early bull for many of today’s top tech stocks.
Her flagship fund, the Ark Innovation ETF, has lagged the S&P 500 by a wide margin in the past five years. It’s flat in that period, while the index is up 106%. But Wood is focused on the long term and her stocks’ ability to transform the world and generate shareholder value.
For weeks, she’s been piling into e-commerce giant Shopify (NASDAQ: SHOP) while reducing her position in artificial intelligence (AI) company Palantir Technologies (NASDAQ: PLTR). Let’s see if such a strategy can make sense for you, too.
Amazon has a firm hold on U.S. e-commerce with about 40% of the total market. Everyone else pales in comparison unless you compare apples to oranges, or Amazon to Shopify. That’s because Shopify is an e-commerce platform, and it doesn’t generate revenue directly from selling products online. Instead, it serves merchants and makes money by providing them with service subscriptions and payment processing. That said, its gross merchandise volume (GMV) is quite similar to Amazon’s core e-commerce sales — $75 billion in the first quarter versus $75 billion from Amazon’s online/physical stores and subscription services. As the largest e-commerce software platform in the U.S., it’s processing a large percentage of domestic e-commerce activity.
There have been ups and downs over the past few years as the company goes through growing pains, and that journey has led to volatility for the stock. Today, it’s in an excellent place, reporting strong growth and increasing profitability. For Q1, revenue increased 27% year over year, and operating income more than doubled. Free cash flow increased 56% with a 15% margin, up from 12% in the year-ago period.
Shopify has multiple growth drivers, and it’s leveraging its top position to harness new opportunities. It has expanded its platform offerings to appeal to a broad swathe of clients, from small businesses to enterprise customers. It’s also making a bigger push abroad — international revenue was only 30% of the total last quarter, giving it a large growth runway.
Shopify stock is still down 36% from the all-time high it reached during the pandemic. Its valuation has come down as a result, but I wouldn’t call it a bargain given its price-to-free-cash-flow ratio of 80 and a forward price-to-earnings (P/E) ratio of 60. This could still be an attractive entry point for long-term investors who can handle some risk.
The market has become infatuated with Palantir stock and for good reason. The data analytics company is growing at breakneck speed and enjoying robust profitability. Generative artificial intelligence (AI) has boosted its capabilities and prospects, and it’s become the poster child for the supercharged AI stock.
Palantir offers two platforms with similar services but geared toward separate markets. Gotham targets the government and defense industries, and Foundry targets commercial industries. Both platforms help organizations and businesses organize and analyze massive data sets to make informed decisions and take quick action. Its services can streamline and sort data for large-language models (LLMs) to make generative AI much simpler for developers, which is why generative AI has emerged as a key growth driver.
In Q1, revenue increased 39% year over year, driven by the U.S. commercial segment, which grew 71%. It closed 139 deals of at least $1 million, 51 deals of at least $5 million, and 31 deals of at least $10 million during the quarter. Total contract value increased 182% to $810 million for the quarter. This forward-looking number represents the potential lifetime value of contracts signed in a certain period.
As a service-based system that’s fast-growing, its margins are extremely strong. Operating margin was 20% in Q1, and adjusted operating margin, which excludes stock-based compensation, was 44%. Net income margin was 24%.
With so much going right for Palantir, there’s only one thing eroding the stock’s investment thesis: its extremely expensive valuation. It trades at a forward P/E ratio of 175 and a price-to-free-cash-flow ratio of 241. Both figures are way above their recent averages.
Cathie Wood isn’t one to be scared off by a high valuation, but even she seems to recognize that Palantir stock is priced for perfection. The company may sustain its strong growth for quite some time, and it may have new products to launch that will expand its market opportunity. Even so, such tailwinds may not be enough to carry this valuation long term. At these levels, investors should carefully assess their risk appetite and conviction before jumping in. Existing shareholders should consider the possibility that going forward, they might find greater returns elsewhere.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Palantir Technologies, and Shopify. The Motley Fool has a disclosure policy.
Cathie Wood Is Buying This Top E-Commerce Stock That’s Down 36%, and She Won’t Stop Selling Palantir. was originally published by The Motley Fool