Palantir: The Secretive, Controversial Big Data Firm

Company Profile

Overview

Palantir is a data analytics software as a service (SaaS) company founded in 2003 by Peter
Thiel, Nathan Gettings, Joe Lonsdale, Stephen Cohen and Alex Karp. Currently, Alex Karp
holds the Chief Executive Officer position, Stephen Cohen serves as the company’s
president, and Peter Thiel serves as the company’s chairman. The company is headquartered
in Denver, Colorado and has office locations across North America, Europe, Middle-East and
Asia. As of 2019, Palantir employs 2,391 employees. The company went public in a direct
public offering on September 30, 2020 and is listed on the New York Stock Exchange
(NYSE).

Palantir’s business model and value offering is relatively unique; there are few companies
doing something similar. Simply put, Palantir builds software in the form of “data fusion
platforms for integrating, managing, and securing any kind of data, at massive scale”.
Moreover, Palantir layers applications for interactive, human-driven machine-assisted
analysis of large amounts of data. Additionally, Palantir’s customer base is unique too, as
they sell their product to government agencies as well as large, blue-chip commercial
customers. As of November 2020, Palantir works with only 125 customers. Around 53.5% of
the company’s revenue is derived from government contracts, the rest from commercial
clients. Palantir’s software is currently “used by customers across 36 industries and in more
than 150 countries”. The company’s government work is of great importance “to defense and
intelligence operations in the United States and its allies abroad”. Regarding Palantir’s
commercial business, the company works with the “most durable and important companies”
in the energy, transportation, financial services and healthcare industries.

Business Model

Simply put, Palantir’s customers pay for the right to use the company’s software platforms.
Palantir thus sells contracts, often in the form of multi-year agreements, to its customers, and
revenues are recognized over the term of these contracts. The price these customers pay is
determined by the estimated value Palantir anticipates these software platforms will bring to
the customer. In terms of growth, Palantir’s business model constitutes three phases: acquire,
expand, and scale.

Throughout the acquire phase, Palantir engages in discussions with existing and prospective
customers in order to identify how their software platform can bring sustained value. In a
next step, Palantir provides these potential customers with short-term pilot deployments of
their software, at little to no cost for the customer. The company believes that, in proving the
value of their platforms, investments during this phase will drive future revenue growth.

The expand phase constitutes significant investment as Palantir seeks to understand the
challenges faced by their customers. This allows Palantir to ensure that their software delivers
the intended benefits and results.
During the scale phase, investment costs generally decrease, while the value provided to
customers increases. Contribution margins of individual customers generally improve and
become positive during this phase. Palantir believes that in the long-term, all their customers
will be in the scale phase.

Products

The company currently offers 2 products: Palantir Gotham and Palantir Foundry. Palantir
Gotham was launched in 2008 and serves analysts at defense and intelligence agencies such
as the United States Intelligence Community and the United States Department of Defense.
“Gotham enables users to identify patterns hidden deep within datasets, ranging from signals
intelligence sources to reports from confidential informants, and helps U.S. and allied
military personnel find what they are looking for”.The product integrates both structured and
unstructured data, provides search and discovery capabilities, knowledge management and
secure collaboration. Palantir Gotham allows governments to improve their national security
by providing valuable intelligence.

The second product Palantir offers is Palantir Foundry, which was launched in 2016 and is
targeted to the company’s commercial customers such as Merck KGaA, Ferrari, and Airbus.
Palantir Foundry is aimed at improving efficiencies in the manufacturing process and
facilitates decision-making across an entire organization. “The platform transforms the ways
in which organizations interact with information by creating a central operating system for
their data”.

Palantir Gotham and Palantir Foundry enable government agencies and large institutions to
mold large amounts of information “into an integrated data asset that reflects their
operations”.

Key Financial Figures

Annual revenues have shown steady growth since 2008:

SOURCE: Palantir Prospectus

$289.4 million Q3 2020 revenues, up 52% YoY from $190.5 million in 2019:

SOURCE: Palantir Q3 Presentation

Average revenue per customer through the first nine months of 2020 was $5.8 million, up
from $4.2 million in 2019:

SOURCE: Palantir Q3 Presentation

Q3 commercial revenue in 2020 was $127 million, up 35% from 2019 figures:

SOURCE: Palantir Q3 Presentation

Q3 government revenue in 2020 was $163 million, up 68% from 2019 figures:

SOURCE: Palantir Q3 Presentation

Financial Figures Commentary

Evidently, Palantir shows great revenue growth, both in the commercial as well as the
government sectors. Moreover, total revenues are projected to be $1.071 billion for the FY
2020, up 44% YoY. Additionally, Palantir’s balance sheet shows healthy figures, with $1.8
billion in cash & cash equivalents and $942.2 million in current liabilities, giving a cash ratio
of 1.91. Although the company has shown growing revenues, they have not yet had a
profitable quarter. Palantir’s income statement shows a loss from operations of $847.8
million in Q3, although a large amount of expenses incurred are attributable to the company’s
direct listing. However, in 2019 and 2018, Palantir also reported a loss from operations of
$576.4 million and $623.4 million respectively. While the company is currently not
profitable, it is investing heavily in R&D, reporting R&D expenses of $313.9 million in Q3
of 2020 alone, $305.6 million in FY 2019 and $285.5 million in FY 2018.

Direct Listing & Share Price Developments

Palantir went public on the New York Stock Exchange (NYSE) in the form of a direct listing
on September 30th, 2020 at a share price of $7.25. For the month of October, the company’s
share price remained relatively stable, fluctuating between highs of $11.00 and lows of $9.00.
The month of November has seen Palantir’s share price surge to highs of $33.50 as
knowledge about the company gained traction in the markets.

SOURCE: investing.com
Key Success Factors

Technology

The success of Palantir’s business depends highly on the strength of their software.
Therefore, significant investment in R&D is necessary for Palantir to survive long term.
Since 2008, a total of $1.5 billion was invested in R&D by Palantir. Additionally, out of
2,391 employees in 2019, 929 were technical staff, including software engineers whose
responsibilities are to improve Palantir’s software.

SOURCE: Palantir Prospectus

Customer Acquisition and Retention

Palantir’s acquisition and more importantly retention of its customers is of utmost importance
for the company’s long term survival. In terms of customer acquisition, the nature of
Palantir’s business can present challenges. Integrated software requires Palantir’s customers
to transform themselves and define their objectives around data. Transformation often faces
resistance, be it from management or employees. Palantir therefore needs to facilitate an
environment in which change can occur rapidly and effortlessly in order to acquire long-term
customers. How Palantir retains its customers will also define its future success. Due to their
reliance on few customers, retaining these customers will prevent Palantir from losing large
amounts of revenues.

Peer Analysis

Key Multiples

Due to the uniqueness of Palantir, this multiple analysis should be taken with a grain of salt.
The peer companies were selected based on Thomson-Reuters recommendations. All peer
companies are active in the SaaS industry and provide data-analytic software to their clients.
However, none pursue the exact same business as Palantir, that is, none work with
governmental defense and intelligence agencies. This should be kept in mind. Additionally,
software companies are often not profitable until they are scaled. This means earnings
multiples could not be used. Software companies are best valued using a price-to-sales or
EV-to-sales multiple. Using this approach, Palantir’s current share price can not be justified,
as it is trading at higher multiples than both the industry mean and median. However,
Snowflake Inc., one of Palantir’s closer peers, trades at even higher multiples, suggesting ….

Industry Trends

Alpha vs. Beta

Software has generally made companies similar as it tends to be designed for standardized
needs. However, standardized solutions are only sufficient in keeping up with the market
(beta). Therefore, software businesses striving to provide greater, differentiated value (alpha),
are required to provide more than packaged, standardized, commoditized software. Software
companies need to capitalize on its unique resources and discover needs that are unmet by
competitors.

Security and Data Privacy

Across the software industry, and specifically regarding companies working with sensitive
data, emphasis is made on protecting privacy. As data becomes more valuable, companies use
it in various ways, be it to gain insights on customers or improve efficiencies along their
value chain. This has caught the public’s attention as personal, sensitive data falls in the
hands of large corporations. Moreover, this trend has resulted in various legal regulations
being implemented, such as the General Data Protection Regulation (GDPR) in Europe. In
the United States, laws surrounding data protection regulate the industry.

Opportunities

Global Crises

Palantir’s products thrive in times of need. In 2020, Covid-19 impacted all industries, many
negatively. Interestingly however, tech companies like Amazon, and especially SaaS
companies like Netflix and Zoom thrived, as investors flocked to put their money in these
relatively unaffected and safe stocks. Evidently, SaaS companies can sell their product
remotely and customers can use their products from practically anywhere, removing the
Covid-19 barrier many industries face. Palantir not only exhibits SaaS advantages, but is
strong in another way: their product actually helps combat the Covid-19 crisis.

It is evident that Palantir’s government branch, Palantir Gotham, can be used to solve many
problems, ranging from infiltrating child trafficking rings to preventing terrorism attacks. As
Covid-19 affected the world, Palantir Gotham was used by governments around the globe to
accelerate and strengthen their ability to combat the outbreak. The product enables public
health agencies to track and analyze the spread of Covid-19, measure the effectiveness of
mitigation approaches, and coordinate with local hospitals and medical suppliers.
Similarly, commercial medical supply manufacturers are using Palantir to gain deep insights
into their global supply chains, understand demand changes in real time, identify and trace
bottlenecks and make optimized decisions under extraordinary circumstances.

While Covid-19 presented many challenges to industries around the world, Palantir thrived as
their product facilitated both governments and commercial companies to battle the challenges
associated with the outbreak. It can be assumed that this is not unique to a global pandemic,
but that crises in general will raise demand for Palantir’s products. A firm losing money will
always see value in higher efficiency through the use of Palantir Foundry, and governments
will always seek solutions through the use of Palantir Gotham. Overall, demand for
Palantir’s products has been increasing “steadily over the past year in the face of significant
economic and geopolitical uncertainty in the United States and abroad.”

Government Backing

Since the early beginnings of Palantir, the United States government has shown large support.
As Palantir’s reach expands around the world, and their software platforms integrate within
governments, the company will have solid, global government backing. Government
agencies, especially in intelligence and defense, would not be able to function without
Palantir’s software, essentially allowing Palantir to lock-in these government contracts.
Evidently, this poses an opportunity for Palantir as their government business would remain
relatively stable in the long-term.

Threats

Customer Base

Palantir currently serves only 125 customers, roughly half of which are governmental and
half of which are commercial. Although Palantir is attempting to scale it’s commercial
business, the company still relies heavily on few customers. In the nine months ended
September 30, 2020, Palantir’s customer concentration shows that its top 20 customers
account for 61% of total revenue for the period. This figure poses a significant threat as it
shows Palantir’s heavy dependence on only 20 customers. If these customers do not renew
their contracts, the company would lose more than half its revenue. Additionally, in the
extreme but possible scenario that the company falls out with their government customers
due to political motives, it would lose half of its revenues.

Controversies

Palantir has been involved in various controversies in the 17 years since it was founded, the
most notable being it’s involvement with Immigrations and Customs Enforcement (ICE)
since 2014. In a contract worth $92 million, Palantir’s product was used by ICE to “carry out
violent (…) raids across the country”. The software is used by ICE every day, and it is still
“an integral part of the agency’s infrastructure”. On September 28, 2020, a report was
released by Amnesty International criticizing Palantir for failure to conduct due diligence on
human rights around its contracts with ICE.

Additionally, Palantir has been involved in racial issues. In 2016, the company faced a
lawsuit from the U.S. Department of Labor, because it’s software allegedly discriminated
against Asian job applicants on the basis of their race. The software routinely eliminated
Asian applicants during the hiring process by favoring white applicants. The lawsuit was
eventually settled in 2017 for $1.7 million, although Palantir did not admit any wrongdoing.

Concerns about privacy and data protection are also amongst Palantir’s rather negative
image. Due to their involvement with large amounts of data, it is inevitable that privacy
activists raise concerns about whether this data is protected and not being exploited by
Palantir itself or across Palantir’s customers.

Overall, resulting from Palantir’s government business, the company has been involved in
political issues. Whether this will affect the company negatively or positively in the long term
remains to be seen, but it is important to note as political issues can be a fine line to walk on.

Corporate Governance

Three of Palantir’s founders, Peter Thiel, Alex Karp and Stephen Cohen, issued special Class
F shares to themselves, granting them over 50% voting power. This is true no matter how
many shares they sell, and is even unaffected if they would leave the company. Essentially,
these Class F shares grants the three founders control of the company for life. As an investor,
one thus needs to be weary of the fact that decision-making within the company will always
be reserved for Peter Thiel, Alex Karp and Stephen Cohen.

Investment Thesis

Based on a thorough analysis surrounding Palantir’s financials, industry trends, success

factors, peers, opportunities and threats, it is evident that the risks regarding the company
outweigh the potential gains, at least in the short-term. It remains to be seen whether a
company like Palantir can become profitable, which is largely dependent on its ability to
scale their commercial business. However, in the long-term, considering Palantir’s intensive
R&D investments, the company may become a feasible investment. Additionally, revenues
have grown YoY since 2008, further showing promising developments for the company.
Lastly, Palantir’s government backing could signify that its software will become a necessity
for many agencies in the near future, further justifying Palantir as an early investment
opportunity. While there are great risks associated with the company, it comes down to
whether you, as an investor, are willing to take the risk in return for potentially high returns.