In this article, I have evaluated prominent software stocks, Palantir Technologies Inc. (PLTR) and The Descartes Systems Group Inc. (DSGX), to determine which could be a better software investment. After thoroughly evaluating these stocks, I think that DSGX might be a superior choice for the reasons discussed in this article.
Rapid changes in business dynamics in the market are expected to benefit the software as a service (SaaS) market as cloud-based solutions support business operations in changing conditions. Also, increasing number of infrastructures have forced organizations to pursue flexible solutions such as SaaS to supervise their operations in a cost-effective way.
As a result, the software as a service (saas) market is expected to grow to $328.03 billion in 2027 at a CAGR of 6.6%.
In addition, artificial intelligence has changed the landscape for many industries across the globe. Rising demand for improved business IoT solutions, self-driving cars, and robots will likely drive the growth of the artificial intelligence software market. The AI software market is expected to reach approximately $1.09 trillion by 2032, at a CAGR of 23%.
PLTR gained 135.5% over the past nine months compared to DSGX’s 8.9% gain. The stock has also gained 172.7% over the past year compared to DSGX’s 18.1% return.
However, here are the reasons why I think DSGX might perform better in the near term:
Recent Developments
On October 4, 2023, PLTR announced the next milestone in its strategic Alliance with PwC, a global professional services firm. The collaboration will combine PLTR’s latest AI capabilities with PwC’s industry experience to help clients realize value with data and AI-enabled operations.
Conversely, On November 14, 2023, DSGX announced that AkkuShop.de, an online battery technology retailer, has achieved a 300% increase in fulfillment efficiency with DSGX’s ecommerce warehouse management system (WMS).
The solution optimizes order fulfillment and warehouse management processes for AkkuShop.de’s extensive product catalog of over 20,000 items, contributing to enhanced customer satisfaction.
Recent Financial Results
For the third quarter ended September 30, 2023, PLTR’s revenue increased 11.4% year-over-year to $558.16 million. Adjusted EBITDA came in at $171.94 million for the same quarter. Adjusted net income attributable to common stockholders came in at $155.02 million and adjusted EPS came in at $0.07.
On the contrary, DSGX’s revenues increased 16.6% year-over-year to $143.39 million in the fiscal second quarter that ended July 31, 2023. Its income from operations came in at $36.83 million, up 16.7% from the year-ago quarter. Its adjusted EBITDA increased 12.2% year-over-year to $60.60 million. Moreover, its net income increased 22.8% year-over-year to $28.12 million, and EPS rose 18.5% from the prior-year quarter to $0.32.
Past and Expected Financial Performance
Over the past three years, PLTR’s revenue grew at a 28.6% CAGR. Analysts expect PLTR’s revenue to increase by 16.5% this year and 18.6% in the fourth quarter ending December 2023. Its EPS is expected to gain 312.4% in the current year and 89.8% over the fiscal fourth quarter (ending December 2023).
Conversely, DSGX’s revenue has increased at a CAGR of 16.3% over the past three years. Its revenue is expected to increase 17.3% this year ending January 2024 and 18.7% in the to-be-reported quarter ended October 2023 and 17% in the fourth quarter ending January 2024. Its EPS is expected to rise 17% this year and 12.9% in the to-be-reported quarter ended October 2023.
Valuation
PLTR’s forward EV/EBITDA multiple of 62.82% is higher than DSGX’s 27.52. PLTR’s forward EV/Sales multiple of 18.07x is higher than DSGX’s 11.76x.
Thus, DSGX is more affordable.
Profitability
PLTR's trailing-12-month levered FCF of 21.2% is lower than DSGX’s 37.71%. In addition, PLTR’s trailing-12-month cash per share of 0.48x is lower than DSGX’s 2.67x.
Thus, DSGX is more profitable.
POWR Ratings
PLTR has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, DSGX has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. PLTR has a D grade for Stability, which is justified by its 24-month beta of 1.97. On the other hand, DSGX has an A grade for Stability, which is in sync with its 24-month beta of 0.66.
Among the 23 stocks in the in the A-rated Software - SAAS industry, PLTR is ranked #18, while DSGX is ranked #9.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Growth, Quality, and Sentiment. Get all PLTR ratings here. Click here to view DSGX ratings.
The Winner
The global software industry is seeing growth as enterprises increasingly rely on software solutions for business operations. Industry players such as PLTR and DSGX are well-positioned to benefit from these industry tailwinds.
However, PLTR's poor profitability and elevated valuation multiples makes its competitor DSGX the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software - SAAS here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
DSGX shares were trading at $81.64 per share on Friday morning, up $0.60 (+0.74%). Year-to-date, DSGX has gained 17.21%, versus a 20.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
Palantir Technologies (PLTR) vs. The Descartes Systems (DSGX): Selecting the Better Software Investment StockNews.com
