Palantir’s prospects are as bright as ever

Last Thursday, Palantir Technologies Inc (NYSE: PLTR) reported that revenue grew 49% for the second consecutive quarter from a year earlier, beating Wall Street expectations and also raising the full-year adjusted free cash flow forecast of more than $150 million to over $300 million.

Revenues in the second quarter

The results were well received by Wall Street, as the data analytics firm reported revenue of $376 million, which translated into adjusted earnings of 4 cents per share. In addition, it impressed with $23 million in cash flow from operations, marking the second consecutive quarter of positive cash flow.

Commercial revenues in the US were up 90% year-over-year, but the number of commercial customers was also up 32% compared to the previous quarter. A net 20 new customers were added during the quarter.

A golden pile

CEO Alex Karp is an unconventional executive known for his colorful outfits, but the eccentricities have worked well for Palantir. After all, the company is more than 230% higher than the reference price of $7.25 last year. The latest move makes little sense, though, as the fast-growing company revealed it had bought $50 million worth of gold bars in August. Most Fortune 500 companies invest in ‘cash equivalents’, which are highly liquid assets such as treasury bills that typically mature less than a year and yield higher returns than cash, helping to offset the effects of inflation.

Square Inc (NYSE: SQ) and Coinbase Global Inc (NASDAQ:COIN) are pushing the boundaries with riskier digital currencies by adding Bitcoin to their corporate assets.

No one can argue that gold has many positive physical characteristics as it is light, scarce, durable and easy to shape. But the current environment appreciates how quickly a currency can facilitate transactions and this is why digital asset classes such as cryptocurrencies are superior to it. In addition, the storage costs of gold are high and liquidity is low. What is contradictory is that gold is often positioned as a hedge against the actions of Palantir’s biggest client, the government. This is why investing in gold is a smart choice when inflation is rising.

Finally, Palantir’s cash flow from operating activities is still not stable as the company continues to reinvest it in its business. Last year alone it was negative $296 million. Lack of cash flow reliability puts a premium on the cash-on-hand stack. The good thing is that his gold position only represents 2% of his total cash and cash equivalents, including blocked cash.

Outlook

For the coming quarter, Palantir expects revenue for the current quarter to come in at $385 million, ahead of the $376 million analysts had expected. For the full year, adjusted free cash flow is expected to exceed $300 million, up from approximately $150 million. Palantir also confirmed that it expects annual sales growth of 30% or even more than 30% by 2025.

The diversification strategy is on track

Kevin Kawasaki, head of business development, said Palantir is on track to more than double its commercial customer base by the end of the year as the data company aims to move beyond its major government contracts. Last month, it launched a subscription-based version of its data collection and analysis technology for start-ups.

In July, the Department of Health and Human Services renewed its agreement to use the company’s software to track the production, distribution and administration of vaccines in the US. In addition, Palantir continues to invest in special-purpose acquisition companies, which has received some attention as it is questioned as to whether it “buys revenue,” but only 1% of 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 the product will help them win.

The verdict

Palantir is executing its “land and expand” strategy, gaining customers and deepening these relationships by adding services. Palantir’s business is improving and starting to become cash positive. Buying gold doesn’t make much sense, but it certainly doesn’t significantly change the company’s share price. After all, the stock has more than doubled in value since its public debut last September, pushing its market cap to over $36.8 billion.

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