Palantir Technologies - big data analytics (data mining for governments and commercial clients)
Palantir is an enterprise software company (data mining). Founded by Peter Thiel in 2003 after he sold Pay Pal for $1.5 bn. Peter saw the opportunity to tackle arguably the most consequential challenge faced by the United States: preventing terror attacks.
Though he had the money to fund it, Thiel didn't have the coding experts to get started. To bring his vision to life, he set about recruiting some old friends: Joe Lonsdale and Stephen Cohen from his Stanford days, and Nathan Gettings from PayPal. The foursome came together to build a data-mining engine, named - "Palantir" or "seeing stones" allow observers to see across realms, scanning both past and future.
The next challenge for Thiel was to hire CEO to run the company. After interviewing many seasoned CEO, Thiel tapped former Stanford Law classmate, Alex Karp (PhD).
Palantir software allows organizations to transform themselves and define their objectives around data.
Journey
Palantir was founded in 2003 to build software for use in counterterrorism operations. Currently, Palantir offers three platforms per below. These platforms allow organizations to combine core data with critical tools into a single platform to help users obtain actionable insights from a unified data asset. What Palantir tackles is the issue of data being siloed and ineffective for problem solving. These problems may relate to manufacturing, product development or customer experience.
Palantir Gotham - was released in 2008 for customers in the intelligence sector. Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants. Currently used by defense/government agencies in the United States and its allies. Defense agencies use Gotham to investigate potential threats and to help protect soldiers from improvised explosive devices.
Palantir Foundry - after the success from Gotham, Palantir started working with leading companies across industries and that’s where Foundry software platform was released in 2016. Foundry is becoming a central operating system not only for individual institutions but also for entire industries.
For example, in 2017, Palantir partnership with Airbus to expand into a platform for the aviation industry, and today connects data from more than one hundred airlines and 9,000 aircraft around the world (that’s almost covering 40% of the worldwide aircrafts).
Palantir is focusing on building partnerships with institutions that have the leadership necessary to effect structural change within their organizations — to reconstitute their operations around data. Over the long term, Palantir believes that every large institution in the markets they serve is a potential partner.
Palantir’s Apollo platform is a software that controls and updates its offerings, also enabling Gotham and Foundry to be deployed in clouds, on-premises, classified networks, edge networks, and devices. Palantir credits innovation in the Apollo platform as its way to achieve margins resembling those of software as a service instead of operating like a consulting business, all hidden to the end users of Gotham and Foundry.
The traditional deployment involves hosting Palantir servers in a customer’s data center. There is a cloud-based offering, as well, so the company can work across a range of hosting environments.
Palantir’s software platforms can be deployed in any environment and buck the trend of requiring highly customized solutions.
Business model
Customers pay to use software platforms built by Palantir. Pricing is based primarily on the value that software platforms will produce for customers.
Customer contracts are generally multi-year agreements. Revenue is recognized over the contract term.
Business model with respect to acquiring and growing customer accounts has three phases. All customers are categorized into these phases on Dec 31st each year. Customers may move back and forth through phases depending on relationship needs and assessment by Palantir.
Acquire - active discussions with existing & prospective customers on business prospects, followed by acquiring new opportunities with minimal risk to customers through short-term pilot deployments of Palantir software platforms at no or low cost to customers. This is generally done at a loss by Palantir to show the value of software platforms to customers.
Palantir evaluate the success of customer accounts in the Acquire phase based on the revenue such accounts generate in the following year.Expand - investment in this second phase is often significant as company seek to understand the principal challenges faced by customers and ensure that software delivers value and results. Customer in this phase have recognized more than $100,000 in revenue in a calendar year and whose account had a negative contribution margin during the year at issue, as determined as of the end of the year.
In 2019, Palantir generated $176.3 million in revenue from customers that were in the Expand phase as of the end of that year, with a contribution margin of (43)%. In H1 2020, those same customers generated $160.5 million in revenue, with a contribution margin of 35%.Scale - after having installed and configured the software across an entire enterprise, customers become more self-sufficient in their use of Palantir platforms, including developing software and applications that run on top of platforms, while still continuing to benefit from the support of company’s operations and maintenance (“O&M”) services. Customer in this phase is defined as any customer from which Palantir recognized more than $100,000 in revenue in a calendar year and whose account had a positive contribution margin during the year at issue, as determined as of the end of the year.
In 2019, Palantir generated $565.7 million in revenue from customers in the Scale phase, with a contribution margin of 55%. In H1 2020, those same customers generated $296.3 million in revenue, with a contribution margin of 68%.Palantir believes that all of their customers will move into the Scale phase over the long term.
Also, company believes that contribution margin for Scale phase accounts will increase further as Palantir become more efficient at deploying software platforms across the entirety of customers’ operations and at managing and operating Palantir’s software.
Use cases to understand Palantir software
Manufacturing - leading manufacturers use Palantir Foundry to connect local decisions with global ones - from the factory floor to the C-suite. Organizations have an integrated feedback loop to rethink product development, proactively address quality issues, and optimize production.
Manufacturing Quality - Improving vehicle quality and ratings
Thousands of automotive plant engineers detect trending defects at their station while vehicles are still on the assembly line, minimizing costly issues later on.Production Planning - Optimizing production globally
A global manufacturer uses Foundry to plan production across hundreds of plants. With a newfound ability to run large numbers of optimization scenarios, analysts more efficiently allot production and have identified ways to save tens of millions of dollars.Vehicle Recalls - Scoping recalls with a leap in speed and precision
By automatically mapping parts to vehicles, Foundry allows a major automaker to identify all vehicles potentially affected by a recall in minutes.
Healthcare - Healthcare institutions use Palantir Foundry to accelerate the rate of scientific discovery. With real-time access to experimental findings, they are performing novel statistical analyses, developing breakthrough insights into diseases, and collaborating in new ways across the scientific community.
Precision Medicine - Turbocharging research at NIH
NIH High-Throughput Screening Robots have tested hundreds of millions of combinations of cell lines and compounds. Researchers use Foundry to access and analyze this massive-scale data, uncovering potential repurposing opportunities, synergistic drug combinations, and genomic correlates of drug response.Field force optimization - Empowering smart, adaptive sales
A pharma company integrates tens of data sources to gain valuable statistical insights into the market. Managers pinpoint new revenue opportunities and sales representatives feed their learnings back into Foundry to continuously improve sales strategies.
Finance - Major financial institutions use Palantir Foundry to centralize and accelerate their operations in compliance with rapidly-changing regulatory terrain. With a unified and securely managed view of their clients, banks are unlocking their ability to collaborate across functions - from client onboarding to marketing.
Single client view - accelerating compliance with a single client view
A global bank automatically resolved 4 billion customer records spread across jurisdictions. Accessing customer information necessary for compliance is now 90% faster.New Account screening - growing the business while minimizing risk
A retail bank could only investigate 30% of new account applications flagged for money laundering risk, and automatically rejected the others. With Foundry, the same team now investigates 100% of flagged accounts.Anti-money Laundering - Powering multi-factor transaction monitoring
Multi-factor alerting models developed in Foundry allow a global bank to address evolving threats and reduce false positive alerts. Alert triage is now 45x more precise and analysts resolve alerts 60% faster.Customer Retention - revealing revenue and retention opportunities
A payments processor integrates billions of records to understand its merchant customer base, boost revenue, and save high-value customers at risk of churn. Insights into customers have generated tens of millions in incremental revenue.
Logistics - Global organizations use Palantir Foundry to create fully operational digital twins of their entire value chain. With real-time insight into complex supply chains and global workforces, these organizations are optimizing global logistics and bolstering customer satisfaction.
Global Supply Chain - scaling a supply chain to help fight hunger
The World Food Program (WFP) uses Foundry to adapt to changing conditions on the ground and safely deliver 12.6 billion rations each year to beneficiaries across 80 countries.Customer Inquiries resolution - Improving high-stakes customer service
A global logistics company effectively resolves thousands of invoice-related inquiries daily while improving customer confidence. Total inquiries have decreased by 10%. And collections are up $50M.
Defense - From strategy to operations to tactics, from reach back facilities to the tactical edge of the battlefield, Palantir Defense gives the warfighter immediate access to the latest critical information, removing the technical barriers to better data-driven decision making.
Sales and Revenue - Organizations use Palantir Foundry to transform sales organizations into data-driven machines. Foundry removes silos among teams responsible for the top line, and provides leadership with a unified view of the entire organization.
Financial Compliance - Foundry allows compliance organizations to meet today's regulatory controls, proactively respond to future concerns, and keep pace with business growth.
Insurance - Key players in insurance are using Palantir Foundry to optimize every stage of the value chain: from underwriting and pricing through to policy administration, claims handling, risk management, and reserving.
Above list is not exhaustive as Palantir claims to touch each and every organization across the globe.
How does Palantir differ from its competitors
The crucial difference is Palantir tackles situations where a company/client may not have the complete data set. Palantir differs from a business intelligence solution like Tableau, Alteryx or Cloudera by answering questions that a model cannot answer. An example might be “how do we service car loans to people least likely to default” or “how do we catch fraud before it happens.”
Snowflake vs Palantir - Snowflake’s software enables organizations to manage and analyze large quantities and diverse types of data across public clouds such as Amazon’s AWS in a single, easy to use platform. Palantir offers big data and analytics solutions primarily used by governments and intelligence agencies, although it has been expanding its presence in the commercial space.
TAM
In S-1 filing, company states the addressable market is $119 billion across commercial and government sectors. The TAM in the government sector is $63 billion and the TAM in the commercial sector is $56 billion. Within the government TAM, domestic is $26 billion and international is $37 billion.
The commercial sector is the growth story. For example, Skywise is a solution that connects in-flight, engineering, and operations data to break down siloed systems around maintenance, flight management and aircraft monitoring and safety. Palantir is partnered with Airbus who offers this solution as “the leading data platform for the aviation industry.”
This example can extend to many industries, such as pharma for drug development data to better understand population dynamics and drug outcomes. This is for the pre-clinical and clinical stages, mapping treatment pathways, and automating reporting. Manufacturing can benefit from Palantir Foundry by managing inventory, saving on distribution costs and prevent delays while increasing sales.
Moat
Palantir has narrow economic moat and a positive moat trend based on customer switching costs, intangible assets, and a network effect. Palantir’s government and enterprise software has become mission-critical and deeply engrained with clients, the company has unique customer and market knowledge to pair with its AI acumen, and its software platforms become stronger as more users, institutions, and industries rely on its solutions. These sources will strengthen, and despite a lack of profitability today, Palantir will generate robust operating leverage and excess returns in the long run.
Palantir has a land-and-expand story: After converting trial customers to its software platform, its software subscriptions proliferate in organizations and the incremental revenue outpaces associated investments required.
Network effects - The more people use Palantir software, the more valuable it becomes. Every data source that is integrated into the system, and every action taken by a developer, data scientist, or operational user, is made accessible to all other users at the institution, provided they have the necessary access permissions. Network effects enable Palantir platforms to function as application aggregators, connecting operational users who need applications to do their jobs with the developers who can supply them. — S-1 filing
Palantir has narrow economic moat rating, primarily based on customer switching costs and secondarily strengthened with a network effect and intangible assets. Palantir sells software solutions aimed at solving the issues of data integration without requiring organizations to start from scratch and provides a centralized view to gain insight from the data through AI supporting manual operations.
Palantir’s platforms are intended to be collaborative across entire organizations: Developers and data scientists can write custom applications on top of the platforms in their chosen coding language while nontechnical individuals can use the platforms and make actionable decisions. By transforming data into common vernacular and views that are easily comprehensible, a network effect exists within organizations as well. Each additional user brings a unique viewpoint and the platforms can spread across an institution. With data constantly being ingested and analyzed, Palantir’s platforms can uncover new insight and notify appropriate individuals that may have not been privy to the new information, making the platforms more powerful as more users participate.
Valuation
Palantir is founder driven company. The company’s founders, Peter Thiel, Alex Karp and Stephen Cohen, own 30.2% of the company’s stock. There are three classes of stock: Class A, Class B and Class F common stock – which is unusual to have three tiers. Class A will allow for one vote, Class B will allow for 10 votes and Class F will share 49.99% of the voting power for Palantir. Class F is for the founders who will retain just under 50% of the voting rights at all times.
Revenue grew by 52% year over year in Q3 2020
Average revenue per customer was up 38% YoY
Adjusted operating income was $73 million
Adjusted operating margin was 25%
Revenue per customer grew while customer concentration decreased. The commercial business grew 35% year over year. The government business grew 68% year over year.
Gross margin, excluding stock compensation, was 81% (vs. 70% in 2019)
The balance sheet holds ~$1.8B as of 30-September, 2020
Expecting 31% revenue growth in Q4 2020, and year-over-year revenue growth to be greater than 30% through 2021. — management guidance during 3Q20 concall
Above table projects Sales growth 50% for 2021-2023, followed by 30% growth from 2024-2025 and then 20% until 2030. Even with such a high growth rate, Palantir projected Sales land at $14bn by 2030, which is only 12% of the overall TAM of $119bn. With economic moat and positive moat trend, it is highly likely that Palantir will continue to grow for much longer time period.
Currently (Dec 2020), Palantir is available at P/S ratio of ~40, which is high valuation for a growth company. However, with projected Sales growth, the current price will turn into P/S ratio of less than 10 by 2024.
Also, if price drops to $16 or lower then P/S ratio will be in the range ~25, which can be a good entry point for this growth company.
Lock-in period - Currently 80% of shares outstanding are locked (with employees and early investors (aka insiders) ) and will be free to trade only on the third trading day after the 4Q20 results (should be in Feb or Mar 2021). This will be significant supply of Palantir stock to come to the market, which will give opportunity to retailer investors to buy the Palantir stock, if the stock price drop. PLTR has skyrocketed since the DPO (direct public offering), insiders might want to sell some portion of their shares to capture profit.
Recent Wins
Three year contract with FDA - On Dec. 8, Palantir said the U.S. Food and Drug Administration (FDA) had awarded it a new three-year contract worth $44.4 million. Palantir already provides services to the FDA, but the new contract represents its largest-ever deal with the agency. Palantir will provide enterprise data management and analytics solutions for the Center for Drug Evaluation and Research (CDER) and the Oncology Center of Excellence (OCE), which will be used to make "critical information more accessible, governable, and secure" as the centers "assess the safety and efficacy of drugs and regulate the industry."
Continuation of a multi-year Army contract - On Dec. 21, Palantir said the U.S. Army would execute the second year of a pre-existing partnership that started a year ago.
Last December, Palantir signed a deal with the Army that could be worth up to $458 million over the following four years, including one base year and three option years. The base year, which just ended, was worth $110 million. The second year, which was just renewed, is worth $113.8 million.
Palantir's platform powers Army Vantage, an analytics platform that gathers data from disparate sources to drive data-driven decisions. The platform was used to make decisions in the fight against COVID-19 over the past year and received a Public Sector Government Innovation Award in November.New contract with the U.K. National Health Service - On Dec. 23, Palantir announced a new two-year contract with the U.K. National Health Service (NHS) to track COVID-19 infections, proactively boost healthcare resources in "emerging hot spots," and divert patients to the most effective facilities.
The NHS will use Palantir's enterprise-facing platform, Foundry, instead of the Gotham platform that serves U.S. government agencies. Palantir didn't disclose the exact value of the deal, but the NHS contract states the deal could be worth up to 23.5 million British pounds ($31.9 million).
Risks
Biggest risk is customer concentration with the top 20 customers accounting for 67% of revenue and the dependence on government contracts at 54% of revenue.
Reputation and social acceptance is also a risk. Tech companies often see employees engage in protests when a company contracts with the government on AI-driven war missions and privacy issues that potentially threaten human rights. Palantir’s biggest obstacle today is the work it does with ICE (Immigration and Customs Enforcement ) which pits the company’s internal employees against the CEO on social issues.
Despite government-backing, Palantir’s products are certainly not bulletproof. The company attempted to launch a platform called Metropolis to help hedge funds with trading and to spot patterns in the markets, among other things. Metropolis, formerly known as Palantir Financial, did not succeed as hedge funds already possessed AI tools that were cheaper and the project was shut down.
Chase Bank used the platform to monitor its 250,000 employees for fraud by mining trading data, emails and phone calls, yet this backfired when it was found out the platform had been used as surveillance for top executives.