Today, the world is saturated in data; more than 90% of the world's data has been created in the past two years. Data science company Palantir Technologies (PLTR 1.79%) went public in late 2020, perfectly timing society's efforts to better use all the data we create each day. Palantir was initially a one-trick pony, relying on government contracts for revenue, but that could be changing. Here are three reasons Palantir's second-quarter 2021 results have the investing world talking.

1. Commercial growth is accelerating

When Palantir went public last year, 76% of its revenue was generated from government customers. This heavy reliance on federal funds was a key risk for investors. Palantir's Q2 2021 earnings went a long way toward addressing concerns that the company is overly reliant on government contracts. 

Palantir's commercial customer count grew 32% in Q2 from the prior three months, indicating that it's successfully getting new prospects into its programs. This is continued momentum from the beginning of the year; the company has increased its commercial customer count 61% since Dec. 31, 2020.

Woman analyzing data in an office.

Image source: Getty Images.

New customers don't immediately contribute to the company's revenues. Instead, they go through a three-phase process called "acquire, expand, and scale." Palantir integrates into a customer's operations (often at a loss) to prove itself before monetizing, once it is "mission-critical" to the customer's operations.

Palantir's revenue from U.S.-based commercial customers grew 90% year over year in Q2. The continued addition of new customers could signal that commercial revenue will continue to grow faster as customers move into the monetization stages of Palantir's sales process.

2. The pipeline is expanding

The company's backlog of contracts is an important indicator of how it's doing. Palantir signs contracts with its customers, so revenue doesn't hit the financials right away. Management refers to this as "total deal value," which is now $3.4 billion, a 63% increase year over year.

The value of contracts added during Q2 was $925 million, a 175% increase over 2020, showing that Palantir's backlog growth is accelerating because this growth during Q2 is outpacing the backlog's growth over the trailing 12 months.

Palantir is making progress in various areas to help further grow its pipeline for new business, including launching Foundry for Builders, a program to make its technology available to start-ups. The company also signed additional deals with the Air Force, Army, and Coast Guard, plus a $100 million deal with SOCOM, a special operations segment of the military.

3. Cash flow is ahead of schedule

The company is not yet profitable, due largely to high research and development expenses and stock-based compensation, which totaled $60 million and $232 million, respectively, almost as much as Palantir's $376 million in Q2 revenue. The company spends a lot of money to innovate and build custom solutions for its customers. The stock-based compensation is used to attract and retain high-end employees, including co-founder and CEO Alex Karp.

At the same time, Palantir is investing in acquiring new customers, making the company more profitable over time as more and more customers reach the later stages of its "acquire, expand, and scale" process.

We have begun to see evidence of this in Palantir's financials, where the adjusted gross margin improved to 82% in Q2 2021 from 80% in 2020. Through the first half of the year, Palantir has dramatically improved its free cash flow, generating $201 million compared to -$232 million the prior year. Management had previously forecasted that free cash flow would reach $150 million at the end of 2021 but increased guidance to $300 million in Q2. The increasing free cash flow is a sign that Palantir's business is becoming increasingly profitable.

Is Palantir a buy?

The stock jumped more than 10% the day Palantir announced its Q2 earnings, and the stock now trades at a price-to-sales ratio of 27.3 and a market cap of $41 billion. With such a large market cap, it's hard to call the stock "cheap," but it's important to realize how rapidly the world's amount of data is increasing.

The global volume of data is expected to surge over the coming years. As it becomes more important for organizations to understand the data they create, Palantir's opportunities are set to continue growing. If the company can prove an ability to jump on those opportunities in the private sector, the potential long-term upside could continue to get people talking about the stock.