FinanceTLDR
Software Engineer and Finance Blogger
"An investment in knowledge pays the best interest." - Benjamin Franklin

Palantir's (ticker: PLTR) stock price increased by more than 150% since its direct listing in September last year. It's no wonder investors are excited about the stock and have high expectations. Can PLTR meet these expectations?

Hold on, what does Palantir do?

Palantir is a SaaS (software as a service) company that provides governments and companies with advanced data analysis tools. In other words, Palantir gets paid to help organizations understand their disparate data in novel and valuable ways.

Palantir's products replicate and restructure an organization's messy data sets into one cohesive data set that algorithms and humans can derive interesting insights from. To this end, Palantir has three main products:

  • Gotham: One of Palantir's earliest products used primarily by governments to perform general purpose data analyses on a broad data set (e.g. geospatial and statistical analysis). Gotham is very useful in discovering bad actors in a system.
  • Foundry: A newer product targeted at businesses to help make forward-looking business decisions. Foundry is designed for ease of use by a large team of data analysts working on the same data sets, as is commonly found in companies.
  • Apollo: A world-class continuous deployment system, Apollo allows Palantir to rapidly deploy upgrades to their software whether it's hosted in in-house data centers or in their customers's data centers.

Bull Case

  • SOLID GROWTH: Palantir has seen tremendous revenue and margin growth in the last few years. Average revenue per customer grew at an annual rate of 30% since 2009 and contribution margins (margins per product) improved by 4x since 2019. In addition, top line revenue grew by 24.7% in 2019 and is expected to grow by more than 40% in 2020 due to COVID.
  • SIGNIFICANT EARLY INVESTMENT, CLOSE TO PROFITABLE: Palantir's critics like to cite the fact that it has been consistently unprofitable in its 17 years of existence. However, I consider this bullish. Palantir has significantly invested in R&D since its inception and this investment is paying off handsomely today. Its three flagship products are contributing to significant revenue and margin growth and if this trend continues, Palantir is only a few years away from profitability.
  • WORLD-CLASS TECHNOLOGY: Gotham and Foundry's ability to be applied to a wide variety of data use cases and serve Palantir's large and varied customer-base is a testament to the company's technical prowess. The state-of-the-art continuous deployment capabilities of Apollo is another example of such. Putting business uncertainties aside, what is certain is that Palantir has the technical capabilities to achieve its ambition of becoming an enterprise's central operating system.
  • LACK OF COMPETITION: In his Zero to One book, Peter Thiel shared that he believes competition is for losers. And true to his beliefs, Palantir, which is co-founded by Thiel, has very little competition. Although there are many data analysis companies out there, none operate like Palantir. Other data companies are good at doing a specific type of data analysis on well-structured data and few are interested in serving government institutions, especially for matters of defence. Palantir is amazing at doing broad data analysis on multiple disparate data sources, has a very strong government business, and isn't shy from serving the government in any capacity. Palantir's investments into data integration dropped the average new customer integration time from a few months to 14 days. The company also leads its peers in investments in a world-class user interface (Thiel's experience in Paypal demonstrated to him that machines are more valuable augmenting humans than entirely supplanting them) and a world-class software upgrade deployment system (Apollo). Put simply, Palantir's competitive advantage lies in is its focus on being an enterprise's operating system such that it can answer broad business questions using a broad data set, while other data companies are focused on answering relatively small-scale business problems with specific data.
  • POTENTIAL FOR LARGE GOVERNMENT CONTRACTS: When you serve a customer with a printing press in their basement, you're bound to get huge contracts. Every year, the US government doles out billions of dollars in kinetic warfare defense contracts to companies like Raytheon. With the threat of cyber attacks growing exponentially, the budget for cyber warfare defense contracts should also increase exponentially. Palantir is in the perfect position to benefit from this.
  • LEGAL PRECEDENCE: Palantir sued the US Army in 2016 for choosing to internally develop a battlefield intelligence system instead of evaluating Palantir's potential to meet the Army's needs. The court upheld Palantir's legal argument that the Army violated the 1994 Federal Acquisition Streamlining Act which states that government institutions needed to use commercially available products if they were cheaper and performant. Palantir eventually won a 10-year $876 million contract from the Army. In the 2020 Investor Day presentation, Palantir's COO Shyam Sankar stated that Palantir's biggest competitor is their customers's desire to internally build solutions and this legal victory sets a positive precedence for the growth of its government business.
  • SKYWISE CASE STUDY: As strong as Palantir's government business is, one can't overlook its potential in the commercial sector. A great case study demonstrating this is Palantir's partnership with Airbus to create the Skywise platform. In 2017, Airbus tapped Palantir to accelerate the production of its new A350 airliner. This resulted in a 33% increase in production rate. Following this success, Airbus and Palantir created an open data platform called Skywise which is used by more than 100 airlines today.

Bear Case

  • LOCK-UP PERIOD EXPIRY: Palantir underwent a direct listing to go public. In a direct listing, no new shares are created while a portion of the existing shares can be sold to the market. In Palantir's case, 15% of its existing shares (244 million shares) were unlocked on listing day and 80% remain locked up (976 million shares and 450 million outstanding options). These 1.4B in shares will be unlocked after 2021's first earnings call, which is slated for Feb 11th. The impending unlocking of so many shares dampens the enthusiam of investors for PLTR leading up to the call. There will also be a small amount of additional selling by pre-public shareholders after the unlocking period to cash in a portion of their gains. I expect bullish sentiment to only pick up aggressively once we're past the unlocking event.
  • POTENTIALLY OVERVALUED: Although the prospects for Palantir are bright, they're seemingly priced in. The one metric I care most about for growth companies is the price to sale (PS) ratio and Palantir has an astronomically high PS ratio of over 40. Even Tesla only has a PS ratio of 30.
  • BIG CONTRACT RISK: Palantir is expected to generate just over $1B in revenue for 2020. However, a large chunk of this revenue consists of a few major contracts. For example, one aerospace customer contract is $300 million. Losing any of these big contracts will significantly hurt its top line.

Trade Plan

It's unlikely for PLTR's price to increase significantly leading up to the expiry of the lock-up period. However, I would enter a long position a few days before the event expecting that it becomes incredibly bullish once we're past it. With most of the R&D for its core product line-up complete, I expect strong growth from PLTR in the next few years as it aggressively acquires new customers and grows the contract sizes of existing customers.