This article originally appeared on Simply Wall St News
Palantir Technologies Shareholders (NYSE: PLTR) have performed very well over the past year, with the share price climbing 136%. Although the company is currently unprofitable, investors have great confidence in the future growth and value of Palantir. The company just won a US $ 823 million contract with the US military, and we wanted to examine the company’s cash flow capacity to bear the expense until it was profitable.
So we think it’s worth asking if Palantir Technologies’ money consumption is too risky.
In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth.
We will start by comparing its cash consumption with its cash reserves in order to calculate its cash flow track.
Check out our latest review for Palantir Technologies
How long is Palantir Technologies’ cash flow track?
A company’s cash trail is the time it would take to deplete its cash reserves at its current rate of cash consumption.
When Palantir Technologies last published its balance sheet in June 2021, he had no debt and cash worth US $ 2.3 billion .
In the past year, its cash consumption was -62 million US dollars. With its current cash flow, and at constant expense, Palantir may have 3 years of operation before running out of cash.
Obviously, the business will grow and reduce its expenses over time, so there really isn’t much liquidity risk.
Are Palantir Technologies revenues growing?
We think it’s pretty positive to see that revenue has increased by 47% over the past twelve months.
While Palantir Technologies is showing solid revenue growth, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth.
Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Many companies end up issuing new shares to fund their future growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Palantir Technologies has a market capitalization of US $ 45 billion and spent-US $ 62 million last year, or -0.1% of the company’s market value. That means he could easily issue a few shares to fund more growth , and may well be able to borrow cheaply.
Is there enough gas behind the stock?
In a situation where investors are enthusiastic and hopeful about a business, sometimes it is better to overspend than to have a tight budget. With a 3-year cash flow track and a market capitalization of $ 45 billion, Palantir might consider launching more pioneering projects to boost revenue growth.
There is no growth without reinvestment, and at this point the business may need a lot more than the 26.4% annual growth rate estimated by analysts. Note that once the new deal is incorporated, this estimate will likely increase, but the company may still want to increase reinvestment rates.
The importance of reinvestment cannot be underestimated for companies in the high growth phase of their cycle. In order for Palantir to justify the high market capitalization, the company must describe current investments and future expansion plans that have the capacity to generate sufficient cash flow.
Palantir has sufficient cash flow and the ability to raise additional capital for at least three years of operation. During this time, the business has the opportunity to develop and become self-sufficient.
It can also be argued that if the company is growing, Palantir struggles to justify current market capitalization and may need to reinvest more in long-term growth. If the company fails to attract shareholders with profitable ventures, three years can be a long wait for a justified market cap of $ 45 billion.
An in-depth quantitative risk review revealed 3 warning signs for Palantir Technologies which readers should think about before committing capital to this stock.
If you prefer to consult another company with better fundamentals, don’t miss this free list of interesting companies that have HIGH ROE and low debt or this list of stocks that are all expected to grow.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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