Editor’s note: This article was updated on Aug. 31, 2021, to correct a typo in the worth of the gold Palantir bought.
When I wrote about Palantir (NASDAQ:PLTR) on July 27, I was skeptical of its future stock performance. This was largely based on the massive employee stock compensation they offer workers. The practice is highly dilutive to existing PLTR stock holders and will put a damper on near- to mid-term opportunities to generate meaningful earnings per share.
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My conclusion was:
“Themes are great. Growth is great. But investing is about the long-term. And investors require a return on their capital above their cost of capital. The lack of near-to-mid term profitability, the massive ongoing share dilution, and increasing competition make PLTR stock very difficult to invest in now.
A price-to-sales ratio of almost 30x does not make it attractive at this time. Patience will be required for a safer entry point at much lower prices than today.”
However, things can change and opinions may reverse course. In this case, Palantir’s latest move has made a difference in my viewpoint.
PLTR Stock Has a New Catalyst
On Aug. 17, it was reported that the company bought $50.7 million in gold bars as part of its internal investment strategy.
In an interview, COO Shyam Sankar stated that the purchase “reflects more of a worldview … You have to be prepared for a future with more black swan events.”
When a fast-growing high-tech growth stock with a leading data analytics platform invests in a 6,000 year old metal, it’s a notable event in my opinion. It seems counterintuitive and contrarian, which makes the purchase even more attractive.
$50 million in gold compared to PLTR’s $50 billion market cap may not move the needle in terms of inflation protection, but it’s a start and I expect more precious metal purchases going forward.
The Role of Gold in the Market
Still considered a rare element, gold is a precious metal that has been used for currency, jewelry and industrial applications for thousands of years.
Gold was used as a standard for monetary policy in the U.S. and other countries for quite some time. But in 1971, this concept fell out of favor and was replaced with a fiat, or paper, currency system.
Physical gold and gold mining stocks like leading producer Newmont Mining (NYSE:NEM) are often seen as a hedge against inflation. With inflation at the forefront of everyone’s mind today, investors are seeking protection from rising prices.
Gold prices neared $2,000 per ounce in August 2020 as government stimulus ramped up to fight the negative effects of the Covid pandemic. However, the price recently dropped to about $1,800.
Many investors are thinking cryptocurrencies might serve as inflation hedges and replace gold, but that has not come to fruition in any meaningful way.
Palantir Saw Strong Q2 Results
Aside from its gold purchases and unique internal investment strategy, business results remain very strong. Total revenues grew 49% from the prior year with commercial revenue growing 90%.
Cash flow from operations was $23 million, which represented a 6% margin. Adjusted free cash flow was $50 million, which was a 13% margin. Additionally, adjusted earnings per share was 4 cents during the quarter. However, GAAP EPS was a loss of 7 cents when you include stock compensation.
Palantir closed 62 deals in the quarter that have a value of $1 million or more. 21 of those deals exceed $10 million in value.
Full-year 2021 guidance was raised to an expected adjusted free cash flow of more than $300 million. That’s a significant increase from prior guidance of $150 million. The company continues to expect annual long-term revenue growth of 30% or greater through 2025.
PLTR Stock Looks More Appealing Now
PLTR stock is a decent buy for its forward-thinking attitude regarding its internal investment policies. I’m still not comfortable with the company’s high levels of stock compensation and lack of near-term profitability. However, continued rapid revenue growth may overcome that serious issue.
For those looking for more direct gold exposure, Newmont Mining looks good at these levels and is supported by a 3.8% dividend yield.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University. He also created the 406dad.com kids adventure blog.
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