Go Long or Short on Palantir (PLTR)?

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Named after the magical crystal ‘seeing stones’ from J.R.R. Tolkien’s “Lord of the Rings” books, Palantir is a secretive company that specialises in deep data analysis. The company first came up in the public radar when its tech was used to locate Osama Bin Laden in 2011; today, its tech is used to trace the spread of COVID-19.

In this article, we’ll provide an overview of the landscape in which the company operates.

 

Company Overview

Over the past few years, government clients have become an increasingly important source of revenue for the company:

The United States has continually risen in terms of geographical importance for the company’s revenues.

While examples of Gotham’s efficacy or deployment details are – understandably – sketchy, the other two services offered by the company do have detailed examples.

In 2009, J.P. Morgan’s top management controversially deployed the company’s Metropolis platform to secretly monitor employee communications and alert the insider threat team when an employee showed any signs of “rogue trader” behaviour by cross-referencing emails, download activity, browser histories, GPS locations of company smartphones, and transcripts of recorded telephonic conversations.

In 2016, the company’s Foundry platform helped Airbus ramp up production of its new A350 by integrating more than 400 sets of data and cutting the time taken to fix production mistakes by a week – which also helped Airbus save several hundreds of millions of dollars.

 

The Pros

While the company’s market share is very low in the advanced analytics space, the company’s level of engagement with its clients, its relatively high cost of services and the highly-confidential nature of its work makes it a very unique company.

Q2 2021 results held some very good numbers for the company with a 63% year-on-year increase in deal value and 113 new deals made with clients.

Interestingly, commercial revenue was up by 90% from a year ago to $144 million. This is heralded as a change in direction for the company – long-known as being sustained by secret government contracts. Its commercial customer count rose 32% from the previous quarter, and the company is expecting to double its commercial customer base by the year’s end. The company is pushing for this goal very aggressively by hiring a little over 100 seasoned sales professionals over the two quarters of 2021.

This doesn’t mean a decline in its government segment: the company reported government revenue jumped 66% to $232 million, with the U.S. military and the U.S. Department of Health and Human Services signing new deals.

Overall, the company’s total contract value booked rose 175% from a year ago to $925 million. Also, revenue growth wasn’t driven by new clients alone: average revenue from its top customers continues to grow upwards. This indicates that client satisfaction is high.

The company isn’t reposing its standing with large corporations. In an unusual break with strategy, it launched a subscription-based version of its data gathering and analytics technologies, targeted at startups in July. Within a month, the company reported signing up a number of new clients in diverse industries such as healthcare, financial technology, robotics and software.

For the next quarter, the company expects a revenue of $385 million vs analysts’ forecasts of $376.4 million. In the long run, the company expects annual revenue growth of 30% or more till the end of 2025.

 

The Cons

The company was estimated to have only 149 distinct customers in both its segments. This is a critical weakness: in 2019, the company reported that its top 20 customers accounted for 67% of its revenue, with its top three accounting for 28%. In fact, a single commercial customer accounted for 12% of its revenue. Therefore, the loss of any of these major customers would be a huge blow to the company’s bottom line.

The company has also stated that it won’t work with “customers or governments whose positions or actions we consider inconsistent with our mission to support Western liberal democracy and its strategic allies.” This means that the total addressable market it can grow into is limited by design. In its addressable market, the company is dogged with controversy. Its product notably has been – and continues to be – used in the tracking of illegal immigrants into the U.S., invoking ire from one specific end of the political spectrum.

One example is the Covid-19 “Data Store” project by the U.K.’s National Health Service (NHS) – conceived to track the spread of the virus using patient data with the company’s Foundry platform. Both the government and the company faced protests from civil liberties and migrant advocacy organizations as well as select members of U.K.’s Labour Party. The contract, which began in March 2020, was quietly extended in December of that year – to even greater protests.

This is an issue: the greatest impediment to securing new clients isn’t another business entity. The threat is from the highly-charged political sphere.

Another critical issue with the company is that it hasn’t turned a profit yet. Over the past 15 years, the company has spent $2 billion in R&D simply in refining its products. Additionally, management compensation packages are a little high. CEO Alex Karp’s compensation – reported this month – includes options worth $797.9 million and another $296.4 million for stock awards. This is estimated to be a standard pattern of compensation for company executives for several years now.

While on the plus side, the company claims to be debt-free, the issue of non-profitability and the high executive compensation makes the company appear to be on somewhat shaky ground.

 

In Conclusion

In an interesting development, the company has recently acquired over $50 million in gold bars in anticipation of a “black swan event” – an unexpected event of potentially severe consequences. This is an interesting new addition to the company’s value since gold assets are considered “recession-proof”. Throughout Q2, the company also started taking stakes in startups using Palantir software, which helped boost sales results.

The company’s unique value proposition and strategies has not gone unnoticed – a total of 5.6 million PLTR shares (worth about $139 million) were added by Cathie Wood’s Ark Invest across all six of its actively managed exchange-traded funds on the 13th of August.

After going public in September last year, the company’s stock (PLTR) performance went to dizzying heights in Q1 2021 – like most stocks – but had cooled down considerably in Q2. Comparing the stock versus the benchmark Nasdaq-100 (NDX) and the powerhouse Ark Innovation ETF (ARKK) gives a pretty strong insight into the stock’s popularity.

Despite the cool-off, PLTR remains a very strong performer on its upsides relative to the benchmark, which also highlights why Ark Invest would be interested in the company. As of last week, the company was still up 154% from when it listed but has been showing intra-quarter choppiness that has becoming the stock’s characteristic before the exultation after a strong quarter earnings call – as seen in Q1 and Q2.

Based on the facts presented and incoming news reports, a shrewd investor should consider the value of going long or short on the stock. The company has a lot of proponents in the marketplace that advocate for either direction.

Your capital is at risk if you invest. You could lose all your investment.
Please see the full risk warning here.

Education Series: Single-Stock ETPs

Authored by

Sandeep Rao

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