Just because a business does not make any money, does not mean that the stock will go down. Young businesses need cash to finance operations and future growth. In the world where cash is king, some businesses are pressured to be profitable as soon as possible, while others can be more strategic and long term in their approach.
So should Palantir Technologies (NYSE:PLTR) shareholders be worried about its cash burn?
For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth - its negative free cash flow.
First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Palantir Technologies Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash.
As of March 2021, Palantir Technologies had cash of US$2.3b and such minimal debt that we can ignore it for the purposes of this analysis.
In the last trailing 12 months ending in March, the cash outflows from operating activities reached US$-240,5m and cash outflows from investing activities reached US$-13m, totaling a cumulative US$-253.5m in the last 12 months (again, ending in March).
In dividing the cash reserves of US$2.3b with the 12-month cash burn of US$-253.5m we get a little over 9 years of available cash runway.
This has multiple implications. Investors have been generous to Palantir and seem to believe in and are enthusiastic for the future of the company. This is evident from the fact that most of the positive cash flows to Palantir are cash flows from financing, which mostly come from investors purchasing new shares.
The second implication is, that Palantir can, and probably will, increase spending on future growth opportunities. This should result in aggressive expansion and a faster bid to tap the addressable market.
You can see how its cash balance has changed over time in the image below.
Is Palantir Technologies' Revenue Growing?
Since Palantir Technologies' is in a high growth phase, we'll focus on its revenue as a measure of growth. We think that it's fairly positive to see that revenue grew 49% in the last twelve months.
While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Palantir Technologies Raise More Cash Easily?
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.
Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Usually, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalization, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Palantir Technologies' cash burn of US$-253.5m is about -0.6% of its US$42b market capitalization. So it could almost certainly just borrow a little to fund more growth, or else easily raise the cash by issuing new shares.
Palantir has a lot of room and time to maneuver. However, shareholders might not be too patient in their expectations of performance, and the company must outline a clear path to growth and profitability.
Palantir has been a "black box" for investors, and many (except for experts in the field) do not truly understand what the company does. This may have been used somewhat to the advantage of Palantir, but numbers are easy enough to read, and investors will be keeping a close eye on the 12th August earnings call.
With more than 9 years of cash runway, some investors might want to see higher investments in future growth.
Taking an in-depth view of risks, we've identified 1 warning sign for Palantir Technologies that you should be aware of before investing.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.