Jul 1, 2021
[18 min Read]
$PLTR - Palantir Technologies Inc. was founded in 2003 (after their fear/anger after the events observed through 9/11) and started building their software primarily for government institutions and intelligence to assist in counterterrorism by any means possible. At this point in time, Palantir's only source of revenue was through secretive government contracts.
However, since that point in time, Palantir has expanded their operations into commercial enterprises, as they noticed a lot of similarities and overlaps with their applications. Now, Palantir's revenue comes from both Government Contracts and Commercial Enterprise Contracts.
Palantir has 2 main software platforms, Palantir “Gotham”, and Palantir “Foundry”.
Palantir Gotham was their first software platform and was designed for defense/intelligence use cases. Palantir has stated that this kind of platform helps agencies find “needles in thousands of haystacks”. They also noted that Gotham helped soldiers in Iraq and Afghanistan to map networks of bomb makers and insurgents through deep/hidden patterns and datasets, helping the army save time and lives. Since this mission, Gotham has expanded into defense operations and mission planning. During this time, Palantir found that Gotham could also be applied in Airbus' business, as their planes require millions of parts, assembled in multiple factories in different countries. However, Palantir decided to make another software platform that is better tailored to commercial enterprises, this platform was labelled “Palantir Foundry”.
Palantir Foundry transforms the way in which organizations interact with their information by creating a central operating system for their data. Palantir enables their customers to construct their own models quickly and easily from countless sets of data points.
Palantir software is used by their 139 Government and Commercial Institutions/enterprises, in over 40 industries, ranging over 150 countries. Palantir works with the US Government and their several allies abroad, as well as the worlds most important/reliable companies.
Lastly, Palantir has stated “We are not in the business of collecting, mining, or selling data. We build the software that enable our customers to integrate their own data that they already have.”
Foundry is essentially a data warehouse that helps their commercial customers to collect and analyze their data. Foundry's platform includes a graphical data interface that is extremely user friendly allowing their customers to get the most out of their data. Furthermore, Foundry provides statistical analyses through the use of their AI machine learning networks that are able to consistently deliver efficient and accurate results.
Foundry helps to enables all of their users, regardless of their technical abilities, to work meaningfully and act with the data that they collect. Foundry provides a suite of applications that help combine data analytics and business logic, helping them to deliver superior data integration.
Foundry's front-end (what the user sees) enables their users to take advantage of all of the data collected by their organization to make informed decisions. Foundry also has a fantastic application for inter-organizational collaboration, this helps a team to build on each others work.
Foundry brings all of an enterprises data together onto their platform, however there are access controls in place to define what individuals get control over which dataset(s). From there, Foundry is able to deliver advanced analytics through their machine learning and AI systems to get the most value out of a company's data, make quality insights, so that their clients can gain a competitive advantage.
Foundries potential use cases are almost infinite.
Dubbed “The Operating System for Government Decision Making”, Gotham helps to improve and accelerate decisions across all levels of Government operations.
Gotham is primarily used by the defense and intelligence sections of the Government, to help them find what they are looking for. Gotham collects data from millions of different sources and combines it all into one platform to identify hidden patterns and bring all of this data to life. This allows their users to access this data and manage their operations to execute real-world responses to threats that Gotham identifies. Gotham is becoming a main data solution across various different government agencies.
There is not too much information that is publicly known about the actual uses of Gotham, which makes sense due to the secretive nature of the organizations that they are in business with. However, what we do know is that these organizations have re-signed contracts with Palantir, which helps us to be confident that this platform is truly “the real deal”.
Lastly, Gotham is also offered to select commercial customers, primarily the companies that are investigating fraud in financial service industries. Furthermore, Palantir has been credited with assisting in finding the largest Ponzi scheme ever (Bernie Madoff's Ponzi Scheme).
Gotham helps the Defense and Intelligence sectors of the Government to pool their incomprehensible amounts of data into one place. Palantir uses machine learning to quickly locate hidden pieces of data, and key patterns, so that these institutions can take swift action to the threats/problems they face in real-time.
Palantir believes that every large institution in the world has a problem in their approach to mass data analysis, and Palantir believes that their platforms are best suited to help companies address this problem and make the most out of their data.
Palantir recognises that other companies sell features, tools, applications, and/or dashboards, however these products are not built to maintain optimal performance in the long run (if at all). Palantir prides themselves on having the best all around software/platform to have sustainable, reliable, and safe data solutions.
Palantir also groups their Foundry data from all of their companies into one large system of several large “farms” of data provided by each of their client companies. By doing this, Palantir is able to feed more data/information into their machine learning, AI, and algorithms so that they can continue to be more reliable and efficient. This also enables cross-industry data pools, that can be used by their companies when they look to expand or for opportunities in other verticals.
Palantir Success Stories:
Perhaps the most notable success story that has come from Palantir is their partnership with $BP - British Petroleum
BP and Palantir have been partners since 2014, and recently (February 2021) BP and Palantir have extended their partnership for 5 more years. Palantir has helped BP to transform their business into a more digital one, and this extension of their partnership will ensure a further acceleration of their strategic digitization of their business.
Palantir's Foundry has already helped BP by streamlining and enhancing their hydrocarbon-based workflows. Palantir helped BP to analyze their drilling data and has helped them to increase their oil production in the North Sea by over 10%.
This increase in production helps us to visualize just how useful Palantir's software can be. This is why their Foundry has been credited as a “competitive advantage”. Other oil producing companies most likely would not have been able to uncover the data, patterns, and relationships that were uncovered by Palantir, thus the companies that are not using Palantir may be losing out.
This type of publicity is fantastic for Palantir, as companies may see this, and contact Palantir because they too want a competitive advantage. Palantir's best chance at becoming the next “tech giant” comes through the commercial applications/contracts. This is because there are infinite uses for Palantir, so theoretically, they can get it in the hands of every business (which would help revenues to soar).
National Institute of Health (NIH) and Britain's National Health Service (NHS):
Palantir has historically been a rather controversial company through their help in government agencies like ICE. However, recently Palantir has been getting good press, which has helped their company image. Since the start of the pandemic some institutions like the NIH and NHS have signed contracts with Palantir, for Palantir's assistance with their fights against COVID-19, and their vaccine distributions. This is good for Palantir as it shows them in a good light and shows that they can help provide the world with help and safety during a crisis like COVID-19.
The NIH agreed to a $36M contract to gain a partnership with Palantir. Their (NIH's), mission is to build the largest centralized COVID-19 patient database in the world, and Palantir has helped them to do this with massive success.
Palantir was able to assist the NIH in building their N3C data platform. This platform has come a long way since they teamed up with Palantir, and now has over 7.1B rows of data from 6.5M patients, from 57 different databases. Without the assistance of Palantir, analyzing this amount of data would have been no easy feat, however Palantir has provided the NIH with advanced analytics in the matter of minutes thank to their machine learning capabilities.
Additionally, in December of 2020, Palantir signed a 2-year $31.5M deal with the Brittan's NHS. This partnership requires Foundry to provide a secure, reliable, and timely platform to process data, while protecting patient privacy, to ultimately improve patient care.
Both of these partnerships highlight the need for Palantir during a crisis and having these large Government Health Institutes choosing Palantir as their first options is a great deal, and shows their confidence in Palantir's software.
Built-in Privacy Controls:
By having privacy controls in place, Palantir is able to operate in places that other data companies cannot go. This is especially true for Foundry, where companies/individuals can request cross-industry data from other Palantir clients to help them in a variety of ways. This request for external data needs to be accepted by a representative of the other company to be allowed. This helps Palantir leverage all of the data that they have on their “Operating System”, which essentially makes their platform a cross-company/cross-country collaborative workspace for all. As Palantir attains more clients, the more attractive/extensive their database is for potential clients. This should help Palantir to expand quickly once they get the ball rolling.
Palantir truly values this privacy and has integrated data legibility, audit logs, access controls, quality checks and requirements to attain external data.
Government Grade Security:
As we know, Palantir started out in just the defense and intelligence spaces. This required Palantir to have elite-level security from the get-go. Their software had to be secure enough to handle national secrets and transparent enough to ensure that the data could be monitored and traced. This is no easy feat, however Palantir managed to achieve this, which is why they have been renewing their contracts with several government agencies.
This is important when trying to sell their products to their commercial clients, because they need something safe and reliable to protect themselves and their data. Furthermore, Palantir currently has IL-5 clearance with the Department of Defense (DoD), which makes them 1 of 4 software companies with this level of clearance (alongside Oracle, Salesforce, and SAP). However, it has also been rumoured that Palantir may achieve IL-6 clearance, which has never been done before as it is the storage/processing of classified information.
This level of clearance should speak volumes to how safe and secure Palantir's technology truly is and should provide ease of mind to companies that they are in business with.
Expansion into the Commercial Sector:
Palantir currently has a huge opportunity ahead of them as they continue to increase their presence in the commercial sector, partnering with some of the largest enterprises in the world. Palantir plans to provide these businesses with the software that they need to do their jobs as efficient as possible and sees large growth potential in this industry.
Palantir has said that they are focusing on building partnerships with enterprises that are willing to undergo structural changes within the organization/operations. Palantir has a huge market ahead of themselves in the commercial sector, and their stock should do well on the news breaking of new partnerships between Palantir and commercial enterprises.
Do you remember what I said earlier about what happens once Palantir gets the ball rolling? If so, you will know where I am headed with this section.
Between 2008-2018 (10 years), Palantir was able to generate $51.9M in revenue from government contracts. However, in the 2 years following this they earned $179.9M in Government contracts (this can be found under the “US Government” section of their SEC 10-K report). Once Palantir was able to get the ball rolling with these agencies, Palantir was able to both expand and renew existing contracts to earn more revenue. I believe that the same thing will happen with Palantir's commercial operations. Once they start to get a large number of big enterprises renewing their contracts for “bigger bucks”, I believe that Palantir will start to grow their revenues extremely quick and attract new clients “left, right, and center”.
These contract renewals are so important because essentially, they mean that Palantir met and/or exceeded expectations, and these companies now believe that Palantir is vital to their business/operations, so look out for news around renewals.
Palantir has developed a business model that focuses on acquiring contracts and expanding their services and has 3 main phases.
All of this information can be found in their SEC 10-K filing.
Explanation of Share Dilution:
Once again, all of the below information can be found in Palantir's SEC 10-K filing.
On September 30th, 2020, Palantir completed their Direct Listing of their Class A common shares on the public markets on the NYSE. Part of this listing involved the redemption of all of Palantir's convertible share into common shares. This was the largest single source of dilution in Palantir (137%). Additionally, this Direct Listing involved the exercise of al outstanding warrants, which resulted in dilution of 1.31%. Another part of their Direct Listing was the common stocks issued, net of issuance price to complete the direct listing, which had a dilutionary effect of 35.51%. Lastly, Palantir was forced to create new common shares that would hold the place of the unvested RSU's, which cause a dilutionary effect of 14.18%.
Without these factors of dilution, Palantir would have only experienced an overall dilution of 20%. This means that due to the Direct listing, Palantir had to increase their shares outstanding by 188.19% to meet the requirements to be eligible for the listing.
Overall Thoughts on Dilution:
Palantir is a very weird stock in terms of their dilution, and I have not seen anything quite like this before. Their overall level of dilution is unprecedented and very worrying for investors. However, we know that these levels of dilution were inflated due to the requirements of undergoing a Direct Listing. However, how does Palantir dilution (excluding the effects caused by their Direct Listing compared to their dilution in previous years?
For starters, Palantir exhibited a 20% share dilution in 2020 when eluding the dilution caused by the Direct Listing. However, historically Palantir has experienced an average share dilution of 5.18% between 2017-2019. So even excluding the effects caused through the Direct Listing, Palantir still experienced a comparably high level of share dilution. However, 20% of dilution is significantly different than the 208.19% of dilution (which would be crazily high). This 20% is relatively normal for an undervalued growth stock, such as Palantir, so currently I would not be too worried. However, investors should keep up with their financial reports and look for their dilution in 2021, because ultimately that will tell us more about Palantir's dilution after going public, than their past share dilution as a private company.
In order to undergo my comparable analyses (which will be discussed later on) I needed to select 4 companies, that I can compare to Palantir.
These companies need to be on the public markets, have similar operations/functions, have similar market caps, operate in similar geographies, and have valid financial ratios.
I was able to come to a decision as to which 4 companies I chose based off of the above criteria, and these companies are as follows:
$ZS - Zscaler Inc: ZScaler is a security as a service company that helps company adapt to cloud technologies and provides their cybersecurity services through the cloud. ZScaler provides their services to both commercial enterprises and governments, similar to that of Palantir. Furthermore, ZScaler offers their service primarily in the USA, but also has smaller international operations (again like Palantir).
$SNOW - Snowflake Inc: Snowflake (like Palantir) is a software and technology company that primarily focuses on data. Snowflake provides data cloud services such as data engineering, data science, data applications, data sharing, and data warehouse. This is very similar to the applications and functions available on Palantir, however Palantir offers other functions that differentiate themselves. Snowflake also provides services for both commercial enterprises and government organizations, similar to that of Palantir.
$SPLK - Splunk Inc: Splunk provide software platforms that deliver insights derived from their clients' data in the USA and internationally. Splunk offers their Ecosystem solutions that consist of data inputs, workflows, reports, dashboards, data visualizations, actions, and methods, and help their clients/customers to make the best out of their data. All of this sounds eerily familiar to the description of Palantir, making it one of the closer competitors. Splunk also offers their services to the public sector as well as the government, making their business model resemble that of Palantir so much more.
$TYL - Tyler technologies Inc: Tyler technologies is probably the company in this list that least resembles that of Palantir, this is because they provide management solutions, accounting systems, billing systems and other solutions geared toward the public sector. Tyler technologies works primarily with governments of all types (Federal, State, and Municipal), and education institutions. However, the one thing that Tyler has that makes them comparable to Palantir is their data and insight solutions. Their data insights software enables collaboration, displays data visualizations/measurements, and generates insights for their human operators to act on.
Q1 2021 Updates:
All of the below information can be found in Palantir's Q1 Investor Presentation.
Recently, on May 11th, 2021, Palantir released their Q1 earnings report. When looking at Palantir's financial performance I did not take this into account, which means that this section will be packed with new information that will help us to understand Palantir's trajectory even more.
First and foremost, this quarter was the first quarter in which Palantir has reported positive earnings. This is a big milestone for Palantir as a public company, and it helps to gets investors excited about the potentially profitable future of Palantir. In Q1, Palantir reported a free cash flow of $151M (was -$290M in Q1 2020) with a 44% adjusted FCF margin, they grew revenues by 49% YoY ($341M), and they grew billings by 248% YoY ($362M) which means that Palantir is acquiring new customers and negotiating higher contracts. These financials are great and show a promising future ahead for Palantir, which should excite their investors.
Furthermore, during this quarter they also disclosed their investment in a SPAC. This SPAC is $QELL - Qell Acquisition Corp. which merging with Lilium. Lilium is an eVTOL transportation company, with this investment they also came to a deal with Lilium to use Foundry for design, engineering, testing, production, quality, logistics, and operations. A while back I looked at another eVTOL SPAC Archer ($ACIC - Atlas Crest Investment Corp.), which has great upside and has a similar business model to Lilium, so if you want to read that to be more informed about Liliums potential performance, click here.
In Q1, Palantir was also awarded with a 5-year $90M contract from the National Nuclear Security Administration (NNSA), in which Palantir will provide the operational platform for their SAFER (Safety Analytics, Forecasting, and Evaluation Reporting) project. This is big news as this is one of Palantir's bigger contracts, and it shows the level of confidence of the NNSA in Palantir's software and their cross-enterprise data integration capabilities. On the topic of Palantir and Government Organizations, the DoD used Palantir's software in all 11 of their Combatant Commands for globally integrated intelligence. This high level of usage from the DoD definitely means that Palantir is doing something right, and if the DoD likes it so much, then it should be more than enough for commercial enterprises.
In Q1, Palantir also hired 50 new salespeople. This is big because Palantir has historically not used salespeople (or dismissed them), however these people are vital to Palantir's business now more than ever. This is due to the fact that Palantir is relying on these salespeople to start winning more of the commercial enterprise contracts as they look to expand this segment of their business. I think this segment is the most important part of their business, and whenever news comes out about more salespeople it is always music to my ears. Also, in Q1/Q2 I have noticed that they are winning more contracts and partnerships than ever before, this is likely due to the salespeople, which provides consistent catalysts for their stock.
Lastly, in Q1, Palantir won 15 contracts worth over $5M, and 6 contracts worth over $10M with an average duration of 3.7 years (4.6 for commercial customers). This is fantastic for the company as they gained an additional 11 new commercial customers from this, and I will be keeping up to date with these contracts and others as they come up for renewal/negotiations. Additionally, Palantir was able to grow their gross margin to 83% (from 75% Q1 2020), and their contribution margin to 60% (from 41% in Q1 2020). This shows that Palantir business partners are maturing into their 3rd phase, the scale phase, which enables Palantir to grow their margins.
I was not able to fit this analysis into one part, so Part 2 should be up right now (Part 2 contains all of the visuals as well so make sure to check it out!)
Part 2 will contain: