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In the fantasy series The Lord of the Rings, Palantiri are spherical stones that help powerful users see what is going on in other parts of the world and communicate with each other.
But what does that mean for your portfolio?
Unfortunately, we don’t have magical stones that can predict the future stock price of Palantir. However, we can still analyze its business and investment potential. Here is what you need to know before investing in Palantir.
What does Palantir do?
Palantir is a big data software company that can aggregate massive amounts of data and turn it into actionable insights for the organizations it serves.
The company was founded in 2003 by Peter Thiel and Alex Karp and first began building software for the United States intelligence community, including the CIA, FBI, and NSA. This is why Palantir has been both secretive and controversial since its founding.
According to Palantir CEO Alex Karp, “The core mission of our company always was to make the West, especially America, the strongest in the world for global peace and prosperity.”
Palantir’s product for government clients, “Gotham”, is the best known and most successful software product in the intelligence community.
Gotham is used by special operators in the field to find and track terrorists, in addition to protecting the military’s sensitive data.
The company’s work with high-profile private sector companies has increased over the past decade with its “Foundry” product. Its commercial sector now accounts for 44% of Palantir’s total revenue.
Large scale enterprises have massive amounts of data in different databases, making it difficult for humans to interact with that data.
Foundry promotes human-driven synergies between humans and computers by integrating data stores of any type, quantity, and at any scale.
However, the company has never turned a profit in its 17 years of doing business. What does that mean for PLTR’s investment potential?
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PLTR Bull Case
We believe the following things need to ring true for Palantir to reach its full potential as an investment:
#1. Palantir is a high-growth SaaS and not a low-margin consulting firm.
Palantir has to show investors that it is a software company and not an expensive consulting firm.
PLTR’s ability to scale will be impacted if it’s more of a low-margin consulting company and less of a high-growth SaaS.
Currently, Palantir’s software is very costly to offer. The company’s growth will be hampered if every contract requires extensive customization before deployment.
PLTR is striving to make its products more robust so they can be launched efficiently and without the need for tailoring.
#2. Palantir books more deals in the private sector
There was a time when Palantir exclusively worked with government agencies, enjoying the deep and reliable pockets of Uncle Sam.
While this is on-brand for PLTR (remember, the company was venture-backed by the CIA), it needs to make its client baseless concentrated in a few names and diversify into the private sector.
PLTR’s top three clients, who are confidential, accounted for 28% of its total revenue in 2020. Its top 20 customers accounted for 61% of total revenue.
There are more opportunities for growth on the commercial side of its business. While Palantir’s government work is crucial to its core mission, we believe a successful emergence in the private sector will unleash this stock.
Here is Palantir’s current customer base in the commercial industry:
- 8 of the Fortune 100
- 12 of the Global 100
- 24 of the Global 300
There are two sides of the coin here:
- Palantir is working with some of the best companies in the world
- There is still plenty of room to grow and ink more deals
#3. Palantir addresses its “$119 billion total addressable market.”
From Palantir’s S-1 filing: “Our market opportunity is significant. We estimate our total addressable market to be approximately $119 billion across the commercial and government sectors.”
Palantir’s penetration rate is currently below 1% of this $119 billion, indicating that the company’s a bit too ambitious or there’s still plenty of room for growth.
Fortunately for Palantir, essentially any business can use its software, hence the massive $56 billion TAM estimate for the private sector.
Today, Palantir’s software is used by customers across 36 industries and in more than 150 countries. Typical clients include those in the drilling, automotive, and aerospace industries.
Although it’s expanding its commercial reach, it is also setting its sights on becoming “the Department of Defense’s operating system.”
While the DoD is unlikely to rely on a single software vendor, Palantir is ahead of the competition when it comes to government clearance.
Palantir is one of 4 SaaS companies with DoD Impact Level 5 (“IL-5”) for Mission Critical Information National Security Systems. Note, the higher the number, the higher the clearance.
The higher the clearance, the more the U.S. government and intelligence community trust the company to handle its private information.
Let’s look at the Impact Levels of other software providers:
- IL-4 SaaS: Oracle, Salesforce, and SAP
- IL-2 SaaS: Google and Snowflake
Palantir is trying to become the first SaaS company to reach IL-6. Speaking of Palantir separating from the pack, let’s see what makes Palantir different from its competitors.
Palantir is building products that other companies don’t build, which is why they don’t have any direct competitors.
PLTR’s software platforms are very expensive to build and are focused on the long-term — a combination that steers the typical SaaS away from this market and into a niche.
Years ago, Wall Street told Palantir not to build these products because there was no market for them. CEO Alex Karp responded, “I know this looks like something no one needs, but they’ll need it in ten years.”
Simply put, Palantir’s differentiator is that it’s very different. They have no interest in what other companies are doing and have a completely different mandate than the classic software giant that tries to increase profits by removing jobs.
Palantir’s COO, Shyam Sankar: “Most software makes users more similar to their competitors; Palantir makes you more differentiated.”
Additionally, while most SaaS products are trying to remove “Bob in Accounting”, Palantir is preserving jobs by making the frontline workers more necessary.
Once these workers are using the software, they’re adding value to the company that would otherwise require a PhD.
Palantir’s Foundry platform makes these factory workers as valuable as the PhDs and underlying software because of the two-way communication between the employee and software.
Additionally, Palantir is willing to go against the political, moral, and physical status quo of Silicon Valley.
From the company’s S-1 filing on its move to Denver: “The engineering elite of Silicon Valley may know more than most about building software … But they do not know more about how society should be organized or what justice requires. Our company was founded in Silicon Valley. But we seem to share fewer and fewer of the technology sector’s values and commitments.”
Karp refers to tech companies who are distancing themselves from the military-industrial complex, most notably Google, who has backed out of contracts with the Defense Department.
Palantir co-founder, Joe Lonsdale, pounced on another opportunity to differentiate Palantir: “Peter [Thiel] and I built a patriotic company. Google is clearly not a patriotic company.”
Palantir refuses to do business with China or any other authoritative regimes. Palantir believes that the country with the most important and powerful A.I. will determine the rules. They want that country to be the U.S. or another Western country.
Palantir believes that software is the language of our time; it’s no longer just a luxury attribute that makes a business more cost-effective.
We’re at a point with software where it’s basically binary: institutions and societies that implement software effectively will dramatically outperform in every context.
According to Karp, “We are going to be the most important software company in the world, and people will figure out what that’s valued at over a long period of time.”
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Palantir Stock Analysis
On September 30, 2020, PLTR went public via a direct listing, meaning it didn’t issue any new shares. It just unleashed those held by existing investors.
The NYSE established a reference price of $7.25 per share, valuing the company at about $16 billion ahead of its official debut. Today, the stock trades in the mid-twenties and has a +$40 billion market cap.
Palantir’s numbers grew significantly in 2020, which is a common, strategic behavior for software companies preparing to go public. Let’s dive into PLTR’s first earnings call:
- Revenue growth: 47%
- Adjusted operating margin: 17%
- 21 deals signed in Q4, each worth $5 million or more
- 12 of which were each worth $10 million or more
- Long-term Revenue Orientation: +$4 billion in 2025
- “Radical” long-term guidance on keeping a growth threshold above 30% over the next five years
Foundry (Commercial Sector)
- Commercial business: generated 107% year-over-year revenue growth in 2020 from U.S. commercial customers.
- Commercial business: generated $482 million in revenue in 2020 (44% of total revenue).
- Commercial industries: automotive, energy, healthcare, insurance, mining, shipping, and more.
- Expanded work with BP (partners since 2014) to power Net Zero Emissions corporate strategy, generating more than $1 billion of value in 2020 through Foundry’s digital twin and simulation system (that recreates every drop of oil across bp plants in digital form).
- Launched a partnership with IBM to integrate (Foundry) with IBM Cloud Pak for Data and IBM’s 2,500-person sales force.
- Signed multi-year, multi-million contract with PG&E to create digital twin (Foundry) for enhanced safety and grid reliability.
- Signed a two-year, $31 million contract with NHS England – throughout which the U.K. Vaccines Program has ordered, allocated, tracked, and delivered all vaccines through Foundry.
- Gotham enables the NHS to monitor the spread of COVID-19 and manage its response, including the allocation and distribution of billions of pieces of PPE equipment
- The U.K. is being praised worldwide for “mastering” its vaccine rollout (thanks to Foundry).
Gotham (Government Sector)
- Generated 77% revenue growth from government customers in 2020
- Generated $610 million in revenue from government customers in 2020 (56% of total revenue)
- One of 4 SaaS companies with DoD Impact Level 5 (“IL-5′”)
*Information Current as of March 16th, 2021
Side Note: PLTR’s share lockup period expired on February 18, meaning there’s no limit on how many shares its insiders can sell — Palantir’s direct listing allowed its insiders to sell 20% of their holdings.
This likely contributed to PLTR’s sharp decline in the week following their first earnings call. Peter Thiel disclosed he sold over 20 million Palantir shares on February 18 (about $500 million worth of stock).
Conversely, Cathie Wood of ARK bought the dip. It acquired nearly seven million Palantir shares for her thematic ETFs, including the flagship ARK Innovation ETF (ARKK) and the ARK Next Generation Internet ETF (ARKW).
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Wall Street Reacts to PLTR’s Earnings
There is a strong divide on Wall Street when it comes to Palantir. Let’s see what analysts had to say on both sides of the street.
Bull: Goldman Sachs analyst Christopher Merwin thinks that Palantir should trade more in line with +30% growth business, which on average are trading at 44 times estimated calendar 2021 sales.
He added, “We were encouraged to see management guide to $4 billion of revenue in 2025, implying a 30% 5-year [compounded growth rate]. With a growing backlog of $2.8 billion in deal value, we believe there is increasing visibility into the achievability of that long-term target.”
Bear: William Blair analyst Kamil Mielczarek is worried that PLTR’s growth is too skewed to pre-existing government contracts and that the stock isn’t appropriately pricing in these potential risks.
Mielczarek added, “New sales efforts, partnerships, and the move to modularization are gaining promising traction but are still too early stage to give us confidence that the company can exceed its long-term growth targets without near-term volatility.”
Ahead of the earnings call, Palantir CEO Alex Karp released a YouTube video explaining its success in the previous year and the future outlook for the company.
He emphasized the importance of a long-term focus: “We want to underscore our relentless long-term focus on the health of what is and will become the most important software business in the world.”
Karp discussed how many technology companies are only serving Wall Street and not their clients because they’re obsessed with quarter-to-quarter performance.
This near-term focus “quite frankly destroys businesses” and “investors that prefer a more short-term focus should choose companies that are more appropriate than Palantir.”
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Palantir Bear Case
It’s important to consider both sides of the trade before buying a stock — let’s identify the potential hurdles this stock may face.
Palantir is over-valued today based on any metric. It is crucial that it demonstrates high-growth behavior in the coming years to justify its SaaS-like valuation.
The company’s ceiling will be much lower if it fails to scale its products and functions as a fancy, low-margin consulting firm.
Next is its high concentration of clients, which makes the company extremely vulnerable to losing a single company or government agency.
Additionally, the company hasn’t been profitable in 17 years, so what is different now? Let’s look at the time it took the tech giants to turn a profit:
- Amazon: 8 years
- Netflix: 6 years
- Facebook: 5 years
- Google: 3 years
PLTR may also have to overcome moral quandaries, given its aspirations in law enforcement and the complications of surveilling America.
NYU professor Scott Galloway asks:
“Do we look at the outcomes from Facebook and think, ‘We should definitely put the guy overseeing Mark Zuckerberg in charge of the algorithms controlling what data the government collects on us, and what behaviors it/he deems as a security threat’?”
Early Facebook investor and co-founder of Silver Lake Partners, Roger McNamee, adds, “Palantir exists to allow law enforcement to investigate citizens without obtaining a warrant.
The data sets come from third parties and (presumably) are filled with errors and implicit bias that infect almost all data sets, whether by design or accident. The business model of Palantir undermines civil rights.”
According to Galloway, “Palantir is all of the calories of Facebook (scaled sociopathy) with none of the great taste (profits).”
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Palantir is playing a different game than the typical software company, which is why it doesn’t have any direct competitors.
It does, however, have competition in individual verticals, like data protection and preparation, for example. Let’s see Palantir’s top competitors:
- Snowflake (SNOW)
- Alteryx (AYX)
- Tyler Technologies (TYL)
- Splunk (SPLK)
Note that while Palantir competes for government contracts, we don’t consider Lockheed Martin or Raytheon to be PLTR competitors per se.
Palantir and the large defense contractors work together more than they compete against each other.
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Palantir Stock Allocation in Your Portfolio
The right amount of Palantir stock in your portfolio depends on several factors that will be unique to each individual.
However, we can ask ourselves similar questions to find the appropriate allocation.
- What are my investing goals?
- Does PLTR get me closer or further away from my goals?
- What is my time horizon for PLTR?
- Can I tolerate a 20% decline in PLTR?
- Do I believe that PLTR can successfully emerge in the private sector?
- Am I okay with some of Palantir’s more controversial operations?
- Is Bitcoin up or down?
- Will PLTR find its footing as a high-growth software company or become a boutique consulting firm?
How to Research Palantir Stock
Just like Palantiri stones can predict the future, so can the Motley Fool. Fortunately for you, the Motley Fool is real and not in the Lord of the Rings.
The Motley Fool has a history of identifying stocks, like Palantir, before they take off. Don’t miss out on their exclusive insights and favorite stocks for 2021.
Our other favorite resource is Barron’s, which has been covering the financial markets since 1921 and is trusted by the smartest money on the street.
How to Buy Palantir Stock
#1. Open an Account with a Broker
You can buy and sell Palantir stock commission-free on Robinhood and Webull. There are no account minimums or hidden management fees on these platforms.
If you choose to open an account with Webull, we recommend investing in a Roth IRA to take advantage of its tax benefits.
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#2. Fund Your Account
You can fund your account on Webull or Robinhood in a matter of minutes. Their frictionless funding process lets you put your money to work right away.
You will need your bank’s account and routing number to fund your account.
3. Buy PLTR Stock
Search for Palantir’s ticker symbol “PLTR” and then enter the number of shares you wish to purchase. Don’t be alarmed by the exploding confetti after your buy order.
You can also buy fractional shares of PLTR on Robinhood, meaning that you have flexibility in your allocation and do not have to buy an entire share of the stock.
Palantir Stock FAQs
What is Palantir known for?
Palantir is a software company that helps its users make better decisions and adapt to their current situations.
Individuals at all levels of an organization can use Palantir to understand the potential outcomes and side effects of a decision before they execute on that decision.
Why is Palantir controversial?
Palantir received backlash once the public became aware of its secret, controversial predictive-policing A.I. that was deployed in Los Angeles, New York City, Chicago, and New Orleans.
Civil liberty groups say Palantir’s tech leads to over-policing of minority neighborhoods.
What is Palantir’s Foundry platform?
Foundry is a first-class data integration and management platform, a comprehensive suite of analytical tools, and an operational platform for business users’ applications.
Foundry represents the digital twin of an organization that enables two-way communication between a company’s digital assets and its real-world operations, allowing teams to feed their unique (human) insights back into the business.
Ideally, it can serve as the central decision support infrastructure for any organization.
What does Palantir’s Foundry platform do?
Foundry is a company’s digital twin that lets it simulate and manage unexpected shocks to its supply chain.
The product translates data and models into knowledge that human operators can use to make better decisions.
The digital twin changes as the organizations themselves evolve in the digital transformation era. This enables companies to adjust toward optimal in every decision they make, for example:
- Identifying the optimal price to sell inventory
- Identifying wind turbine positioning to maximize electricity generation
- Plotting shipping routes that will maximize revenue over the years
What Makes Palantir Different?
Palantir thinks of an enterprise as the sum of the decisions it makes. So it built products to provide integration between all the various silos of decision making within or across organizations.
Palantir is the connective tissue that links optimization to actual operations — by powering “what if” analyses and enabling businesses to treat their operations like code, companies using Palantir’s software can stage and test changes before they are applied.
According to CEO Alex Karp, “The way in which Palantir is providing software in Foundry, Gotham, and its ability to scale through Apollo, will be the way that others try to build software, and the way institutions try to procure software.”
Did PayPal lead to Palantir?
Yes, the early founders of PayPal began using computers to reduce cyber fraud, which eventually led to the founding of Palantir.
Instead of using a reactive algorithm to detect fraud after it happened, they realized the better approach was to use an adaptive human mind against an adaptive opponent.
A human mind that applies its own version of algorithms to data works preventively and can get ahead of malicious actors.
So, they took the technology they built at PayPal to the intelligence community and Palantir was born.
Palantir didn’t want to build a new product for each unique case, though; they wanted to build a scalable product that solved underlying issues and could be available and useful to any enterprise.
What is Palantir Apollo?
Palantir Apollo is the continuous delivery software that powers the company’s SaaS platforms, Foundry and Gotham, in the public cloud and beyond.
Apollo’s continuous and automated updates can be the difference between life and death for Palantir’s customers.
According to PLTR, “Our platforms are often deployed to users in environments where other SaaS could never operate — from the back of a Humvee to the hull of a submarine.”
Why is Palantir not profitable?
Palantir’s software is incredibly expensive to build, resulting in its expenses exceeding its revenue each year since 2003. Additionally, the cost to acquire and service new customer contracts is expensive.
Palantir must function as a high-growth SaaS and not a consulting firm to reach its full investment potential.
We believe this feat is achievable if PLTR’s Foundry platform successfully scales in the commercial sector.
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Bottom Line: Palantir Stock
We understand Wall Street’s divisiveness on PLTR — the company hasn’t made money in 17 years, yet its leaders remain focused on the long-term.
However, there’s plenty of room for growth and companies with cult followings tend to do well.
This is not your typical company. Do not expect typical investing results.
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Sean Graytok owns shares of Palantir Technologies Inc.