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3 Software Stocks Analysts Like Better Than Palantir

Barchart - Tue Oct 17, 2023

Shares of Palantir (PLTR), the enterprise software company, have been on a tear so far this year. Fueled by its artificial intelligence (AI) ambitions, strong earnings, and recent contract wins, Palantir's stock price has rallied 175% on a YTD basis. 

That said, its present valuations are looking a bit stretched as a result, to put it mildly. Key metrics, like forward price/earnings (76.42), price/sales (16.87), and price/cash flow (74.61) all exceed sector medians by a considerable margin. Moreover, PLTR has an overall rating of “Hold” from analysts - and the mean target price of $13.81 actually denotes expected downside potential of more than 21% from current levels.

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With Palantir potentially overpriced at current levels, here we'll discuss three other stocks from the software industry that analysts like better - all with an average rating of buy or better, and 17% upside potential or more from current levels. 

Confluent

Founded in 2014 and based out of Mountain View, Calif., Confluent (CFLT) provides a unified platform for building and running real-time applications. Its notable clients include Netflix (NFLX), Airbnb (ABNB), and Uber (UBER). Its platform is used by companies for fraud detection, customer recommendation systems, and data processing, among other applications.

Commanding a market cap of $9.18 billion, Confluent's share price is 37.7% on a YTD basis.

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The company's latest earnings results were strong, as revenues moved higher. Revenues for the quarter came in at $189.3 million, up 36% from the prior year. Meanwhile, adjusted earnings were breakeven on a per-share basis, which marked an improvement from the previous year's loss of $0.16 per share. In fact, the company's bottom line has exceeded expectations in each of the past five quarters. 

Key metrics, like remaining performance obligations (up 78% YoY) and customers with ARR greater than $100,000 (up 33% YoY), also improved.

Meanwhile, to corner a larger chunk of its $60 billion addressable market, Confluent is building a comprehensive Data Streaming Platform that uses five integrated processes of streaming, connecting, governing, processing, and sharing. Confluent has already started monetizing these components by starting a freemium licensing/subscription to increase engagement and revenue.

Analysts have assigned a “Moderate Buy” rating on the stock, with a mean target price of $37.68. This indicates an upside potential of nearly 23% from current levels. Out of 25 analysts covering the stock, 14 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 10 have a “Hold” rating.

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UiPath

Low-code robotic process automation (RPA) platform developer UiPath (PATH) was founded in 2005, and is headquartered in New York City. It enables organizations to automate repetitive tasks performed by humans to improve efficiency and accuracy and reduce costs. The company currently commands a market cap of $9.18 billion.

UiPath stock is up 30.2% in 2023 so far.

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In Q2 2023, UiPath reported revenues of $287.3 million, a yearly increase of 18.6%, while the EPS of $0.09 compared favorably to a loss of $0.02 per share in the year-ago period. Moreover, the EPS came in above the consensus estimate of $0.04 per share. Notably, UiPath's annualized renewal run rate (ARR) of $1.31 billion also improved by 25% from the prior year. Remaining performance obligations, meanwhile, rose by 28% yearly to $905 million. 

UiPath expects its product portfolio to benefit immensely from the generative AI revolution, as evidenced by its latest earnings presentation. Coupled with the company's recent strategic shift towards cloud-based offerings (cloud ARR recently crossed $500 million, up 125% YoY), should bode well for future growth.

Overall, analysts have pinned a “Moderate Buy” rating on the stock, with a mean target price of $19.57 - indicating an upside potential of 18% from current levels. Out of 16 analysts covering the stock, 5 have a “Strong Buy,” 1 has a “Moderate Buy,” and 10 have a “Hold” rating.

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Datadog

We round out our list with cloud applications monitoring and analytics platform Datadog (DDOG). Datadog was founded in 2010 in New York City, and it provides a unified view of infrastructure, applications, and services, enabling DevOps teams to troubleshoot problems quickly and scale their operations efficiently. 

The company currently commands a market cap of $29.42 billion, and Datadog's share price is up 23.2% on a YTD basis.

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Datadog reported second-quarter revenues of $509.5 million, up 25% from the prior year, while EPS jumped 50% to $0.36. The company's EPS topped consensus estimates, as did revenue. 

Customers with an ARR of more than $100,000 rose to 2,990 from 2,420 in the previous year. Further, the company also saw an improvement in free cash flows (up 135.6% YoY) and free cash flow margins (28% vs 15% in Q2 2022).

Datadog has also been making moves in the arena of generative AI, as it recently launched the Bits AI assistant, which learns from customers' observability data and helps engineers resolve application issues in real-time. Also, Datadog has been slowly making strides in the security business, as over 5,000 customers have adopted Datadog's security products, and 79 customers spent more than $100,000 in Q2 2023.

Analysts have an average “Moderate Buy” rating on the stock, with a mean target price of $106.31. This denotes an upside potential of about 17% from current levels. Out of 32 analysts covering the stock, 20 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating and 9 have a “Hold” rating.

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On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.