Palantir (PLTR) is a company like no other. Misunderstood by both laypeople and experts alike, its opaque and secretive work with government and military organizations can make investors feel as if they’ll never quite grasp what its business is really all about. But Palantir is more than just a number crunching tool for spies – it’s probably the world’s most important data analytics firm.
In this article we’ll cover the reasons why Palantir makes for such a great stock choice, and highlight some of its shortcomings – and the few things it still needs to get right.
Palantir: A Sticky Business With A Big TAM
Arguably Palantir’s most attractive feature is its unique moat as a high-level data analytics company.
The firm is famous for its contracts with government bodies all across the world, and in its first decade as an operational business, Palantir (PLTR) was dedicated to working on government-related – and government-funded – software projects. Some of its earliest clients included agencies such as the FBI, CIA, West Point and the Marine Corps – to name just a few.
Which brings us to why the company’s revenues are so sticky: government contracts are usually large in scale, and it’s just not feasible for customers to change vendors partway through a project.
In fact, much of what Palantir does is on a scale far in excess of what is usually taken as normal in most settings. It’s part of what makes it special; Palantir is aggregating, integrating, visualizing and analyzing vast amounts of data from which it then gleams insights for its clients.
This isn’t the sort of work that can be passed from one company to another without a lot of disruption, and so Palantir’s contracts tend to be long term, with high retention rates – which is good for business, and good for revenues.
Furthermore, the total addressable market (TAM) available to Palantir is enormous. On what many consider a conservative estimate, Palantir has rated its current TAM as being worth around $120 billion. This is based on a government sector and commercial sector TAM of $63 billion and $56 billion, respectively. However, analysts predict this will rise to $230 billion by 2025.
Palantir (PLTR) had an annual revenue of $1.1 billion in 2020, implying it still only has a market penetration of just 1%. The company’s estimated revenue for 2025 is expected to be about $4 billion, suggesting the company will gain double its current market share over the next four years.
And just one further point: the amount of data available in today’s world is almost so large it’s practically unconscionable. Each day, 500 million tweets and 300 billion emails are sent, and it’s estimated that by 2025, 463 exabytes of data will be generated on a daily basis.
To compare: all the words uttered by humans thus far account for only 5 exabytes. Data is the raw material that Palantir thrives on – and there’s a lot of it. It seems there will be plenty of work to keep the company busy for a very, very long time.
Expanding Its Reach
Government agencies account for around 55% of Palantir’s revenues, and the company is keen to make more of an impact in areas it is currently under-represented in.
In fact, Palantir has made significant steps in growing its customer base the last few months, and these measures will be important in driving revenues over the long-term. Initiatives such as altering its price-model from an upfront, multiyear one, to a subscription-based format instead – and widening its sales and marketing team – should help pay dividends in the future.
The company is also offering its platform free to major firms operating in key sectors that it feels would benefit from Palantir’s system.
Indeed, expanding its presence in the commercial field is a big theme for Palantir at the moment. Besides its success among public and governmental organizations, the company recognizes how important private enterprise will be to its long-term growth. Palantir’s previous commercial uptake has been poor, with the addition of just 14 new private customers over the course of two quarters at the beginning of 2020.
In a bid to capture more of the small and medium-sized business market, Palantir has recently introduced its Foundry for Builders, a product designed for hyper-growth start-ups. If this succeeds, the company could have an out-of-the-box Enterprise Resource Management-like product ready to roll-out to businesses in industries as diverse as healthcare, manufacturing, fintech and legal consulting.
One point of concern for investors might be Palantir’s controversial stock-based compensation (SBC) scheme. The program cost the company 56% of its revenues in the last quarter, and a total of $1.3 billion in 2020. It is believed that Palantir feels it needs to offer such an attractive benefits package to entice the best engineers to the firm, especially given the creative and intellectual demands that its projects require.
However, some claim the SBC will be dilutive to other shareholders – although the situation may not be as bad as it initially seems. First, the SBC appears to be somewhat front-weighted, with a large part of the scheme having been executed last September.
Since then, SBC margins have been falling from 293% in September 2020, to 75% in January 2021 – and finally to 57% this March. Absolute values for the SBC plan have also been dropping, while revenues for the company keep going up.
Second, another reduced SBC payout in the next quarter could actually act as a positive catalyst, showing that previous fears about the scheme were unfounded, thus stoking investor confidence.
Palantir doesn’t have many customers – and of those it does have, only a small fraction generate the majority of its revenues. For instance, the company had 149 clients in the first quarter of 2021, up from just 125 in the second quarter of 2020.
Lead times for new customers are also high at around 12 months, which means that getting new revenue producing companies on its books is a laborious effort.
If the firm lost any of its big-paying customers, it would be in serious trouble – and finding new blood to take their place wouldn’t happen overnight.
There is one red-flag that should worry investors: Insiders of the company have sold roughly $244 million worth of shares in the last three months, and none of those selling have repurchased any of the firm’s stock either.
Even more concerning, Palantir’s CEO, Alexander Karp, is the insider to have sold most of the shares. However, given that the business has so far remunerated employees through its SBC program, this sell-off isn’t entirely out of the ordinary, and investors should monitor the next quarterly filing to determine if this is simply insiders liquidating shares as pay, or if they’re selling because of some as yet unknown negative development.
Is Palantir Fairly Priced?
Palantir isn’t profitable yet, but it is growing revenues at a rate of 43% year-on-year – and its EV-to-Forward Sales multiple of 27 is about the same as for other SaaS companies in the space. The firm isn’t exactly outperforming Wall Street expectations, however, having only matched its EPS estimate while beating revenues by just $9 million.
Still, the company has a long way to go to full maturity. And with data being the future, the market for analytics has never been better. Palantir is a leader – if not the leader – in this sector, and its stock could be today’s data version of what Google (GOOG) was to web search back when it floated in 2004.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.