about 3 years ago • 3 mins
Palantir – which provides the CIA and FDA with data analytics software – posted a suspiciously mixed earnings update on Tuesday, and it’s no secret investors weren’t impressed.
What does this mean?
Palantir’s government clients – which make up over half the company’s sales – have been using its tools more than ever in an effort to predict pandemic hotspots, allocate protective equipment, and distribute vaccines. But while that drove Palantir’s revenue to an expectation-beating 40% last quarter, it still wasn’t enough to offset its high costs – or to finally turn Palantir into the profitable business analysts have been waiting for.
Why should I care?
The bigger picture: The future’s looking less bright.
Palantir relies on new contracts to keep its income stream flowing, and the firm’s freshly signed deals with BP and IBM should help with that this quarter. But investors – who initially sent its shares down 6% on Tuesday – might be concerned about the rest of the year: the company’s only expecting to grow its revenue 30% in 2021 – a significant step down from last year’s 47%.
For markets: Now it’s just the “lockup” to worry about.
Palantir’s share price has more than tripled since the company made its stock market debut last year, but things could be about to get more volatile. Like most firms, Palantir forced long-time shareholders to hold off selling their shares after it went public. That kept them from rushing to sell up, flooding the market, and depressing the company’s stock price. But when that “lockup” period expires later this week, 80% of the company’s shares will become eligible for trading – and that same scenario might end up playing out anyway.
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The world’s riskiest companies have been selling “junk bonds” in their droves this year, and investors have had one heck of an appetite for them.
What does this mean?
The Federal Reserve has been pouring money into the US economy to keep it ticking over, which has pushed the country’s interest rates to ultra-low levels. That’s allowed and encouraged risky companies – ones with a higher likelihood of failing to repay their loans – to sell investors so-called “junk bonds” at rates usually set out for only the safest companies.
And investors – potentially fed up of making such low returns on relatively safe bonds – seem to have been more than happy to buy them. Not just any old junk bonds, either: the riskiest of them, which this year have made up the biggest share of all junk bonds sold since 2007.
Why should I care?
For markets: This is essentially a bet on the economy.
Some investors are feeling uneasy about the quality of bonds that have been hitting the market: a lot of these companies, after all, still have a high chance of bankruptcy. Others seem to have more confidence that a successful vaccine rollout will work wonders: they’re essentially betting an economic rebound should see company profits – and, in turn, companies’ abilities to repay investors – rise.
The bigger picture: Junk bond investors might be onto something.
It’s easy to understand why some investors might be tempted. See, credit rating agencies – which regularly assess companies’ abilities to repay their debts – drop bonds to a lower rating if they look like they’re getting riskier. But in the long term, those that have only just been downgraded actually tend to outperform the ones already classified as risky. That might be why investors piled a record amount of money in January into an exchange-traded fund that tracks these “fallen angel” bonds.
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