Palantir Technologies (PLTR) CEO Alex Karp is certainly an unconventional executive. The self-described socialist known for his colorful outfits now finds himself among the richest Americans, with a net worth north of $2 billion.
To date, Karp's eccentricities have worked well for Palantir. The company went public last year via a direct listing and now finds itself more than 230% higher than its $7.25 reference price. However, not all unconventional decisions are brilliant -- Palantir's latest move appears not to make any sense.
A golden purchase
Palantir's second-quarter earnings were well-received by Wall Street. The company topped analyst expectations for the bottom line by reporting adjusted earnings per share of $0.04 and significantly beat top-line estimates of $353 million by booking $375 million in sales.
Palantir is clearly executing on its "land and expand" strategy, winning clients then deepening its relationships by adding services, growing revenue by 49% over the prior year, and winning 20 net new customers.
The company also impressed by reporting $23 million in cash flow from operations, the second consecutive quarter of posting positive cash flow. For that reason, the disclosure that it bought $50 million in gold bars in August seems to be an odd choice for the high-growth company.
Four reasons gold is odd for Palantir
Palantir is certainly not the first company to buy non-cash assets with its corporate Treasury funds. In fact, most Fortune 500 companies invest in "cash equivalents," highly liquid assets like Treasury bills, investment-grade corporate bonds, and municipal bonds with maturities usually less than one year. The reason is these cash equivalents have higher yields than cash, which helps to offset the impacts of inflation.
Companies like Square and Coinbase are pushing the envelope by adding riskier digital currencies such as Bitcoin to their corporate holdings. Karp is certainly a non-conventional CEO, but gold is a head-scratcher for Palantir for the following reasons:
- Gold is a poor transactional currency. Gold has many positive physical characteristics: It's light, scarce, durable, and easy to form. However, in today's environment, how fast a currency can facilitate transactions is paramount. For this reason, alternative digital asset classes like cryptocurrencies are superior to physical gold for corporate treasury holdings.
- Storage costs are high and liquidity is low. Palantir disclosed that its gold would be held at a "secure third-party facility located in the northeastern U.S." and the company could take possession with "reasonable notice." Palantir's HQ is in Denver and the storage costs were undisclosed. Unlike other cash equivalents, gold will cost money to hold versus providing a return while doing so.
- The optics are bad. Although private sector growth has been rapid, the bulk of Palantir's revenue is from governments, which will prefer to transact in their fiat currencies. Additionally, since gold is often positioned as a hedge against inflation and runaway government spending, the acquisition seems antagonistic to Palantir's largest clientele.
- Palantir's cash generation is still unreliable. As noted above, Palantir isn't reliably producing cash flow from operations yet as the company continues to reinvest into the business. Last year the company's cash flow was negative $296 million. When it's difficult to reliably produce cash from operations, it puts a premium on a company's cash-on-hand pile.
Palantir still has a bright future
While Palantir's gold purchase seems odd to market watchers, it shouldn't significantly impact the company's path forward. For starters, the company reported having total cash and cash equivalents of $2.4 billion (including restricted cash), meaning its gold position represents only 2% of its total cash pile.
In the long run, Palantir's gold pile could be a smart investment if inflation continues to surge. However, with operating cash difficult to come by at this stage in Palantir's growth cycle, optimizing its cash and cash equivalents for liquidity and the ability to transact quickly with little risk of purchasing power loss seems ideal. Physical gold is a poor choice in that regard.
That said, Palantir's operations are improving and beginning to turn cash-positive, which is why investors reacted favorably to the recent earnings report. Its gold purchase is a head-scratcher, but certainly doesn't change the long-term investment thesis for the company.