Saturday, September 11, 2021

Palantir: Operating profitability and expense trends (Its Saul Goodman)

One of my go to metrics to look at how well a company is operating, is to look as cash flow generated from operations. When a company executes well, the cash flow from operations increases and the 'On balance cash flow from operations' (OBCFO) will increase from quarter to quarter. When this metric increases  quarter over quarter, or year or year, or quarter over quarter last year, these are positive signs of increase in operational cash. The reason, I really like cash flow from operations, is that this is a measure of recurring revenue which is inherent to the day to day functions of the company. The other cash flows are cash flow from investing activities (these include purchases of physical assets, securities, or the sale of securities or assets) and cash flow from financial activities (activities involving debt, equity, and dividends). These latter 2 cash flows are indicators of investment savvy and financial gymnastics of a company and no so much a reflection of how the company operates. The cash generated from operations can be reinvested into the company for growth in term of new tech, acquisitions, product development etc. With that brief introduction, lets look at Palantir and its cash flow for the past 8 quarters.

Cash Flow from operations compared to Stock price.


Figure 1: On balance cash flow from operations compared to stock price for Palantir

It took me a while to change my mindset, that a stock price is not the company and a company cannot be evaluated on basis of stock price alone. A stock price is a marker of the sentiment of what the majority thinks the company is valued. In any case, let compare the OBCFO to price of Palantir's stock. This is shown in figure 1. The price, is the closing price on the week, the results of earnings came out.

One of the immediate things to notice is that the OBCFO has increased over the last quarters and it shows a healthy uptrend. Another important feature in this figure, is what I call “fundamental bullish divergence” (green arrow), this happens when the stock price is trading lower and the OBCFO is actually higher, this usually, a strong clue for me to add to shares or enter a new position (provided I believe in the leadership and company management). This event happened after the March 2021 earnings, where the price was trending lower than its recent high.

Cash Flow from operations compared to reported sales and marketing expense.

 

Figure 2: On balance cash flow from operations versus Sales and Marketing expense for Palantir

This however is only part of the equation, if for some reason the cash flow is not increasing, like it did in quarters ending 6/30/2020 to 12/31/2020, then we absolutely must look for reasons why. One place which may explain why cash flow from operations was low, is if the company used some of that cash to either grow the operations (either by increasing sales and marketing) or by focusing on research and development. This is shown in Figure 2, as on balance cash flow from operations is falling (blue line) from periods 6/30/2020 to 12/31/2020, the reported sales and marketing expense is rising. So this fall in cash flow was a “good thing” (grey shape - dotted line)

Cash Flow from operations compared to reported Research and development expense.

Figure 3: On balance cash flow from operations compared to Research and development expense for Palantir

I also make it a point to look at R&D expense, after all, if a company is to grow, it needs to continue to innovate and apply those discoveries to further its mission. This is shown in Figure 3, as on balance cash flow from operations is falling (blue line) from periods 6/30/2020 to 12/31/2020, the reported expense for research and development is rising. So this fall in cash flow was a “good thing” (grey shape - dotted line)

 Palantir, in this case has executed flawlessly for the past few quarters and its all good man (In case you did not get the humor reference in title) and this give me good confidence that the company will continue to grow and as consequence of this, the stock will also continue to grow.

 Disclaimer: I am long term investor and own shares of Palantir. The data were obtained from public sources.