Palantir's Outlook Is As Bright As Ever

Last Thursday, Palantir Technologies Inc PLTR reported its revenue soared 49% from a year earlier for the second consecutive quarter, smashing Wall Street's expectations and also raising its full-year adjusted free cash flow outlook from more than $150 million to more than $300 million.

Second-Quarter Earnings

Results were well-received by Wall Street as the data analytics company reported revenue of $376 million that translated to adjusted earnings of 4 cents per share. Moreover, it impressed with $23 million in cash flow from operations, making this the second consecutive quarter of positive cash flow.

U.S. commercial revenue surged 90% YoY, but the commercial customer count also increased 32% compared to the previous quarter. During the quarter, it added 20 net new customers.

A Gold Pile

CEO Alex Karp is an unconventional executive known for his colorful outfits, but its eccentricities have worked well for Palantir. After all, the company finds itself more than 230% higher than its $7.25 reference price last year. However, the latest move does not make much sense as the high-growth company disclosed it bought $50 million in gold bars in August. Most Fortune 500 companies invest in "cash equivalents," which are highly liquid assets like Treasury bills that come with maturities usually shorter than one year and higher yields than cash, which helps to offset the impacts of inflation.

Square Inc SQ and Coinbase Global Inc COIN are pushing the borders with riskier digital currencies by adding Bitcoin to their corporate holdings.

No one can argue that gold has many positive physical characteristics as it is light, scarce, durable, and easy to form. But, today's environment values how fast a currency can facilitate transactions and this is why digital asset classes like cryptocurrencies are superior to it. Moreover, gold's storage costs are high and liquidity is low. What is contradictory is that gold is often positioned as a hedge against the actions of Palantir's largest client- the government. This is why investing in gold ends up being a smart choice when inflation rises.

Finally, Palantir's cash flow from operations is still not stable as the company keeps reinvesting it into its business. Only last year, it was negative $296 million. Lack of cash flow reliability puts a premium on the cash-on-hand pile. The good thing is that its gold position represents only 2% of its total cash and cash equivalents, including restricted cash.

Outlook

For the undergoing quarter, Palantir expects revenue in the current quarter to come in at $385 million, exceeding the $376 million that analysts projected. As for the full-year, adjusted free cash flow is expected to exceed $300 million, up from approximately $150 million. Palantir also reaffirmed that it expects annual revenue growth to amount to or even exceed 30% through 2025.

The Diversification Strategy Is On Track

Kevin Kawasaki, the head of business development, stated that Palantir is on track to more than double its commercial customer base by the end of the year, as the data company aims to expand beyond its large governmental contracts. Only last month, it launched a subscription-based version of its data gathering and analytics technology for start-ups.

In July, the Department of Health and Human Services renewed the agreement to use the company's software to track the production, distribution, and administration of vaccines across the US. Moreover, Palantir continues to invest in special purpose acquisition companies, which has attracted some scrutiny as some question if it is "buying revenue" but only 1% of the total revenue in the quarter was tied to these investments.  Kawasaki stated that the company aims to work with these companies for a very long time and that its product is what will help them win.

The Verdict

Palantir is executing its "land and expand" strategy that involves winning clients and deepening these relationships by adding services. Palantir's operations are improving and beginning to turn cash positive. Its gold purchase does not make much sense but it certainly does not significantly alter the company's path forward. After all, shares have more than doubled in value since its public debut last September, pushing its market cap to more than $36.8 billion.

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