For most people, Palantir remains a mystery. Founded in in 2003 by right-wing Peter Thiel and initially funded by the CIA, Palantir, whose name comes from Tolkien’s “seeing stones” in Lord of the Rings, is not the traditional Silicon Valley tech company. Its unique business model, its ground-breaking products and its secretive approach have made it one of the most interesting companies in the US market, valued at around 20 billion. Contrary to expectations, though, last month Palantir decided to list on the NYSE, and in its filings to the S.E.C, some of the shadows were cast out.
A unique business model
Palantir develops data analysis software that is used both by commercial and governmental institutions in the western world.
Palantir offers two products: Gotham, which is used by government and local police departments for defence and intelligence, and Foundry, which allows private enterprises to organize and better interpret data. Engineers are sent to the client to personally supervise the implementation of the product, an approach that makes it more similar to a consulting company. The clients have then complete control over their data, and Palantir gives full discretionary to the client on how to use it.
The main clients of Palantir are governmental agencies (mainly in the US, but also in France and UK), big manufacturing corporations (FCA, Airbus) and financial firms (Morgan Stanley, JP Morgan.) In its SEC filing, Palantir reported only 125 clients worldwide, including the US army and many agencies like C.I.A., F.B.I., N.S.A., H.H.S. (Department of Health and Human Services) and I.C.E. (Immigration and Customs Enforcement). Its biggest 3 customers accounted for more than a third of its 743 million revenues in 2019. Notably, the company has decided not to sell its products to government and corporations that do not align with the company’s values and has refused to work with the Saudi Arabian and Chinese governments.
The AI and big data sectors are still in their youth, and no competitor at this time offers products able to challenge Palantir directly. Nevertheless, companies like IBM, Google and Qlik or Chinese Baidu and Tencent all have the capabilities to be runner ups in a capex-heavy industry like this one. Still, Palantir holds important connections in US state agencies and has been a reliable partner for more than 10 years, and a difficult one to change; given the nature of the product, switching from a data integration service to another is extremely costly (contracts are usually worth more than 100m) and would mean losing important historical data.
A unique business model
Palantir develops data analysis software that is used both by commercial and governmental institutions in the western world.
Palantir offers two products: Gotham, which is used by government and local police departments for defence and intelligence, and Foundry, which allows private enterprises to organize and better interpret data. Engineers are sent to the client to personally supervise the implementation of the product, an approach that makes it more similar to a consulting company. The clients have then complete control over their data, and Palantir gives full discretionary to the client on how to use it.
The main clients of Palantir are governmental agencies (mainly in the US, but also in France and UK), big manufacturing corporations (FCA, Airbus) and financial firms (Morgan Stanley, JP Morgan.) In its SEC filing, Palantir reported only 125 clients worldwide, including the US army and many agencies like C.I.A., F.B.I., N.S.A., H.H.S. (Department of Health and Human Services) and I.C.E. (Immigration and Customs Enforcement). Its biggest 3 customers accounted for more than a third of its 743 million revenues in 2019. Notably, the company has decided not to sell its products to government and corporations that do not align with the company’s values and has refused to work with the Saudi Arabian and Chinese governments.
The AI and big data sectors are still in their youth, and no competitor at this time offers products able to challenge Palantir directly. Nevertheless, companies like IBM, Google and Qlik or Chinese Baidu and Tencent all have the capabilities to be runner ups in a capex-heavy industry like this one. Still, Palantir holds important connections in US state agencies and has been a reliable partner for more than 10 years, and a difficult one to change; given the nature of the product, switching from a data integration service to another is extremely costly (contracts are usually worth more than 100m) and would mean losing important historical data.
Note: estimated revenues in China come from outside business operating in the country. No Palantir technology is sold in China
The IPO
On September 30th, 2020, Palantir listed indirectly on the NYSE. This means that no new shares were sold, but that the original owners sold 20% of their shares. This also means that underwriters were not needed to access demand and set a price. The refence price was $7.25, valuing the company at 15bn$ and the next day shares opened at $10 and are currently at around $9.5, valuing Palantir at just under 16bn. The company reported $743m in revenues in 2019, up 25% YoY, but reported a net loss of $580m. These numbers surprised some analysts, as the company has been in business for 17 years and was reportedly getting hefty contracts from the US government in recent years.
Indeed, analysts cannot agree on the valuation of Palantir, as some believe it is worth up to 28bn (Morningstar) and some just 6b (Morgan Stanley). The uncertainty is given due to several reasons, for instance:
On September 30th, 2020, Palantir listed indirectly on the NYSE. This means that no new shares were sold, but that the original owners sold 20% of their shares. This also means that underwriters were not needed to access demand and set a price. The refence price was $7.25, valuing the company at 15bn$ and the next day shares opened at $10 and are currently at around $9.5, valuing Palantir at just under 16bn. The company reported $743m in revenues in 2019, up 25% YoY, but reported a net loss of $580m. These numbers surprised some analysts, as the company has been in business for 17 years and was reportedly getting hefty contracts from the US government in recent years.
Indeed, analysts cannot agree on the valuation of Palantir, as some believe it is worth up to 28bn (Morningstar) and some just 6b (Morgan Stanley). The uncertainty is given due to several reasons, for instance:
- Palantir has reported losses in all 17 years of its existence. Its expenditure in marketing and R&D, given the technological advance nature of the business, have been the main reason. Intermediate aggregates demonstrate the ability to produce positive margins (gross margin in 2019 was 500m, 67% of revenues), above the industry average 53%. In 2020, the company has tried to reduce the cost of goods sold and its working capital, mainly by reducing the time engineers spent by the client (down to 14 days from 45) and developing a remote platform (Palantir Cloud) which allows the software to be implemented remotely. COGS went down 4% in the first semester of 2020, YoY, as did the Working Capital (-18% to 30% of revenues). The company also cut marketing costs 17%, down to 61% of revenues in 2019. Given the nature of the industry, heavy competition could hinder Palantir’s position in the next years if its not able to consolidate its status as market leader and begin creating profits.
- Palantir clientele is very small (only 125 clients), and the company relies on US governmental contracts and a couple of important partners in the commercial sector (Airbus most of all). Hence, the challenge for Palantir will be to attract more corporate clients for commercial applications. The advertising given by publicly listing will be beneficial in this sense. Palantir estimate the total addressable market to be around $119bn worldwide.
- Palantir reputation has been injured in recent years by some of its contracts. I.C.E, for example, used Palantir’s software to track and arrest clandestine immigrants in the US, and this has sparked the anger of human-rights activists. Moreover, right-wing and outspoken Trump supporter Peter Thiel, one of the four co-founders, is also a reason of controversy. Palantir has been at the centre of political debate for a time: Democratic Representative Alexandria Ocasio-Cortez, for instance, has recently asked for an investigation in the company, which she described as “risky” and “opaque”. Some employees have also left the company because of the events related to the I.C.E. contract.
Source: Palantir S-1 filing to the S.E.C
Controversy
Palantir’s software enables governments and private enterprises to make the most of their data. For instance, Airbus was able to cut the time needed to fix a production mistake on their assembly lines from 24 to 17 days, saving millions of dollars. FCA uses Palantir in its Ferrari F1 Scuderia. At JP Morgan, instead, Palantir now-dismissed Metropolis was used to spy on colleagues to find sign of disgruntlement – a practise that stopped when senior executives found out they were being watched. But the most controversial aspect about Palantir’s software comes from its use by the U.S. government. Palantir began supplying platoons directly in Afghanistan in 2011, and its software was able to avoid several ambushes and, all in all, make the soldiers job much safer. Following this success, it has been used by police departments (L.A.P.D., N.Y.P.D.) and state agencies in the US, France, and the UK. Its most recent contracts with I.C.E., though, sparked anger among human right activists as it was instrumental in catching and arresting illegal immigrants in the United States.
Palantir’s software is only part of the reason why the company is on everyone’s lips, and not always in a positive way. Mr Thiel’s views on privacy and democracy (he reportedly said: “democracy and economic freedom are incompatible”) have been deemed hurtful to the company’s reputation, and distanced Palantir from other Silicon Valley’s tech companies (notoriously against Trump). The decision to relocate from the Silicon Valley to Denver, then, comes as no surprise. In this regard, the words of the CEO Alex Karp in the company’s SEC filings are clear: “We have chosen sides” - implying Palantir difference from other tech companies. Perhaps unsurprisingly, during the Trump presidency Palantir was able to get some important contracts (some of which were no-bid) and increase its revenues.
What does the future hold for Palantir?
Palantir offers an innovative technology and is seen by most of its clients as irreplaceable. The COVID-19 pandemic has only made it clearer how important big data is for governments. Also, for private enterprises managing customers data is already a priority and will become more so in the future. Nevertheless, Palantir’s heavy dependence on governmental contracts and the controversy some of them raised make it a riskier company. As CEO Alex Kramer said, the net priority for Palantir is to attract more corporate clients and maintain the technological hedge it has on its rivals. If it can succeed to do so, Palantir’s outlook will be decidedly positive.
Carlo Geat
BSCM would like to thank FactSet for providing charts and data. The FactSet platform has been extremely useful in all the stages of the draft of this analysis.
Palantir’s software enables governments and private enterprises to make the most of their data. For instance, Airbus was able to cut the time needed to fix a production mistake on their assembly lines from 24 to 17 days, saving millions of dollars. FCA uses Palantir in its Ferrari F1 Scuderia. At JP Morgan, instead, Palantir now-dismissed Metropolis was used to spy on colleagues to find sign of disgruntlement – a practise that stopped when senior executives found out they were being watched. But the most controversial aspect about Palantir’s software comes from its use by the U.S. government. Palantir began supplying platoons directly in Afghanistan in 2011, and its software was able to avoid several ambushes and, all in all, make the soldiers job much safer. Following this success, it has been used by police departments (L.A.P.D., N.Y.P.D.) and state agencies in the US, France, and the UK. Its most recent contracts with I.C.E., though, sparked anger among human right activists as it was instrumental in catching and arresting illegal immigrants in the United States.
Palantir’s software is only part of the reason why the company is on everyone’s lips, and not always in a positive way. Mr Thiel’s views on privacy and democracy (he reportedly said: “democracy and economic freedom are incompatible”) have been deemed hurtful to the company’s reputation, and distanced Palantir from other Silicon Valley’s tech companies (notoriously against Trump). The decision to relocate from the Silicon Valley to Denver, then, comes as no surprise. In this regard, the words of the CEO Alex Karp in the company’s SEC filings are clear: “We have chosen sides” - implying Palantir difference from other tech companies. Perhaps unsurprisingly, during the Trump presidency Palantir was able to get some important contracts (some of which were no-bid) and increase its revenues.
What does the future hold for Palantir?
Palantir offers an innovative technology and is seen by most of its clients as irreplaceable. The COVID-19 pandemic has only made it clearer how important big data is for governments. Also, for private enterprises managing customers data is already a priority and will become more so in the future. Nevertheless, Palantir’s heavy dependence on governmental contracts and the controversy some of them raised make it a riskier company. As CEO Alex Kramer said, the net priority for Palantir is to attract more corporate clients and maintain the technological hedge it has on its rivals. If it can succeed to do so, Palantir’s outlook will be decidedly positive.
Carlo Geat
BSCM would like to thank FactSet for providing charts and data. The FactSet platform has been extremely useful in all the stages of the draft of this analysis.