Palantir (NYSE: PLTR) reported its Q2 2022 results on August 8th. While revenue and earnings mostly met expectations, its underwhelming forward guidance sent shares down 13% following the report.

While I don’t worry too much about any particular quarter’s numbers, Palantir’s long-term business results are a big of a mixed bag right now.

The good news is that it’s making incredibly strong progress on the commercial front with its “Foundry” platform. Global commercial revenue grew 46% year-over- year, which was an acceleration from the 28% growth in Q2 of the year prior. Within the US, commercial revenue grew an outstanding 120%. Palantir makes Foundry available to small businesses through integrations with cloud providers like Amazon Web Services and Microsoft Azure; and it offers it as a usage-based service that can get fully implemented at customers within a matter of weeks. Health care has been a bright spot, as Palantir has helped organizations distribute the COVID vaccine and also to standardize and protect vast amounts of clinical data for drugmakers. Palantir Healthcare generated $153 million of revenue in the first half of 2022, up from $42 million in the first half of 2020 during the earliest stages of COVID. Commercial revenue as a whole is now more than 40% of the total top line.

Yet the company’s government business is a bit less inspiring. Government revenue — tied to Palantir’s Gotham platform — grew only 13% during the quarter, which is yet another quarter of deceleration (down from 66% annual growth a year ago).

The culprit for Palantir’s slowing government sales is a delay in several of its core government contracts. CEO Alex Karp explained how these cash cows of the company’s business can often be unpredictable.

The large and chunky nature of our contracts will continue to be, in large part, an advantage because these contracts do not disappear. Sometimes, they are put off. Sometimes, they take too long for us to get them.

But at the $1 billion range of the contracts that we are working on, they have the bug of sometimes taking too long and the feature of a highly difficult, tumultuous and politically uncertain world that you actually get paid and you actually make free cash flow.

Palantir Chief Business Affairs and Legal Officer Ryan Taylor elaborated further.

We have the great privilege of being on the forefront of the problems that matter most in the world, from the war in Ukraine to fighting famine and monkeypox. Across government and commercial, the opportunity in front of us is enormous, which makes the revised near-term outlook all the more disappointing. It doesn’t come close to representing our ambition and the opportunity before us.

While the timing of large contracts in government can be frustrating, the underlying requirements and needs are enduring. It’s worth noting that our revised guidance excludes any new major U.S. government awards. At the same time, we have seen the opportunity presented by this environment before.

As organizations around the world face more pressure and experience more pain, there will be a slowdown in the rate of spending and lengthening of sales cycles, but it will also reveal gaps in enterprises operations, gaps our software can solve. In the short term, this means less revenue now. But on longer time horizons, it accelerates our business. The global financial crisis, ISIS attacks in Europe, the COVID pandemic, through each upheaval, we emerge substantially stronger by investing in our customers ahead of revenue and delivering results in days, not months.

I believe those are fair points. The government isn’t always going to be a perfectly-predictable revenue stream, yet there are continual international conflicts brewing in Eastern Europe and in the South China Sea. Palantir is nearly halfway through its four-year, half-billion dollar deal with the Department of Defense and has plenty of other opportunities ongoing. While those mega-deals can be somewhat opaque (and even controversial), it’s still very clear that Palantir is building long-term, deeply-embedded products that are immensely valuable for its customers.

Does the unique, eccentric company deserve a spot on your watchlist?  Click the link below to learn 7investing lead advisor Simon Erickson’s conviction rating for Palantir.

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