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These Are the Major Potential Risks Facing Palantir Technologies Right Now

By Rachel Warren and Danny Vena – Dec 8, 2021 at 12:28PM

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Here's what potential and existing investors need to know.

Data analytics company Palantir Technologies (PLTR -0.43%) has been publicly traded for a little over a year. Since that time, shares have risen by about 100%.

The secretive software firm, which numbers the CIA and FBI among its list of clients, has intrigued many investors. In recent years, the company has increasingly focused on growing its client base outside of its lucrative government contracts. In the third quarter, Palantir reported that its total revenue was up 36% from the year-ago period, while its commercial customer count surged 46% year over year. In addition, U.S. commercial revenue, which indicates revenue from non-government clients, popped 103% year over year.  

All of this bodes well for Palantir's future business growth. But what are the risks that potential investors need to be aware of before taking the plunge? In this clip from Backstage Pass, recorded on Nov. 1, Motley Fool contributor Danny Vena delves into the company's risks and long-term potential.  

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Danny Vena: Now, one of the risks I'm going to throw out there right now, is that Palantir at one point had more than 50% of its revenue come directly from the government. Anytime I see that, that's a red flag for me personally. Because you lose your government contracts and all of a sudden, half your revenue is down the drain.

The company has been working to mitigate that risk and with Foundry, which is what they've added, they've actually been gaining a lot of corporate enterprise level business, helping them draw information from siloed data, using AI to analyze it. Then to give them important information about their operations, about their customers, about their competitors. That's one of the more important aspect of Palantir as an investment.

Now since going public, the stock is up roughly 170% versus 37% for the S&P 500. In their most recent results, the second-quarter results revenue was up 49% year-over-year but their commercial revenue, and that's the non-government revenue, was up 90%. That's what I was talking about. How the company is expanding beyond its government roots and really moving into the enterprise space. They had 62 deals that were worth more than $1 million.

Of those, they had 30 deals that were worth more than $5 million dollars. They had 21 of those deals that were worth more than $10 million. Their total customer numbers are up by 13%, but if you look at their commercial customers are up 32%, so they're really focusing on building out that enterprise revenue stream. Now, the company is still generating net losses, but is cash flow positive.

The reason that's important is because a lot of times a company will be unprofitable because of non-cash items like depreciation. If you have a company that is putting up, plowing a lot of money into, for instance, developing the software that they're going to use for the next decade, they end up generating a lot of losses on an accounting basis. But if you look at the cash flow and the cash flow is positive and growing, that generally means that a lot of those losses are just on an accounting basis.

Finally, the company's total contract value and for those who are invested in software-as-a-service companies might recognize something called remaining performance obligation, which is contracts that you have in place, the money is contractually obligated, but you just haven't been paid yet because the contract lasts for one year or two years or three years. Their total contract value grew 175% year-over-year. That tells me that the company has a long runway and is quickly gaining converts over the course of the next couple of years.

Danny Vena owns shares of Palantir Technologies Inc. Rachel Warren has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Palantir Technologies Inc. The Motley Fool has a disclosure policy.

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