Zscaler and The Trade Desk might be better near-term growth plays.
Palantir Technologies (PLTR 0.51%) has been a divisive stock ever since it went public via a direct listing in September 2020. The bulls were initially impressed by the data mining firm’s robust growth, the stickiness of its government contracts, and the growth potential of its commercial business. Its ability to aggregate data from disparate sources to help its clients make smarter data-driven decisions also made it a promising play on the artificial intelligence (AI) market.
Palantir’s stock has more than doubled from its opening price of $10, but it remains nearly 50% below its all-time high. Its revenue increased 41% in 2021, but grew just 24% in 2022 and 17% in 2023. That deceleration — which missed its own goal for at least 30% growth through 2025 — made it an easy target for the bears as interest rates rose. It mainly attributed that slowdown to choppy government spending and other macro headwinds.
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Palantir’s revenue is stabilizing, and its profits are rising, but it’s still worth $46.6 billion — which gives it a frothy valuation of 17 times this year’s sales.
There are two less valuable tech stocks — Zscaler (ZS -0.25%) and The Trade Desk (TTD 1.71%) — that have the potential to eclipse Palantir’s current market capitalization in just two years.
1. Zscaler
Zscaler, which has a market cap of $26.5 billion today, provides “zero trust” services, which treat everyone — including a company’s CEO — as a potential threat. Unlike many other cybersecurity companies that install on-site appliances, Zscaler only provides its tools as a cloud-native service, which is stickier, cheaper, and easier to scale.
From fiscal 2020 to fiscal 2023 (which ended last July), its revenue grew at a compound annual growth rate (CAGR) of 55% as companies scrambled to upgrade their internal defenses. Like many other cloud-based cybersecurity companies, Zscaler faced a slowdown over the past year as the macro headwinds made it harder to lock large customers into longer-lasting contracts. But during its latest conference call in February, CEO Jay Chaudhry said it wasn’t experiencing any “significant pressure” on its big deals, and that zero trust remained a “top priority” for many industries.
Analysts expect Zscaler’s revenue to grow at a CAGR of 27% from fiscal 2023 to fiscal 2026 as it overcomes those near-term challenges. Assuming it still trades at 12.5 times its trailing sales by the end of fiscal 2026, its market cap could reach $41 billion. If it’s trading at a more generous 15 times sales, it would be worth nearly $50 billion.
Zscaler isn’t profitable on a generally accepted accounting principles (GAAP) basis yet, but it occupies a more defensible niche than Palantir, it’s growing faster, and it’s still trading at lower valuations than the data mining company.
2. The Trade Desk
The Trade Desk, which is worth $42.8 billion, owns the world’s largest independent demand-side platform (DSP) for digital ads. DSPs help advertisers automatically purchase ad space across a wide range of platforms — including desktop PCs, mobile devices, and streaming video services. They sit on the opposite end of the supply chain as sell-side platforms (SSPs), which help publishers sell their own ad inventories.
Tech giants like Alphabet‘s Google and Meta Platforms bundle together DSPs, SSPs, and other advertising tools, but they usually lock advertisers and publishers into their walled gardens. To tear down those walls, many companies are turning to independent DSPs like The Trade Desk to reach the “open internet” of other websites, apps, and streaming video services.
The Trade Desk’s revenue grew at a CAGR of 33% from 2020 to 2023, even as the broader advertising market grappled with the pandemic, inflation, geopolitical conflicts, and rising rates. Most of that growth was driven by the rapid expansion of ad-supported streaming video platforms. Its usage of first-party data and AI-driven ad placements also helped its clients deal with Apple‘s restrictions on third-party data across iOS devices.
Analysts expect The Trade Desk’s revenue to continue growing at a CAGR of 22% from 2023 to 2026. If it’s still trading at 17.5 times sales by then, it would be worth over $60 billion by the end of 2026. The Trade Desk might initially seem as pricey as Palantir, but the ad tech leader is growing faster than the data mining company and boasts clearer competitive advantages.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Apple and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Palantir Technologies, The Trade Desk, and Zscaler. The Motley Fool has a disclosure policy.