Today we’re talking Palantir and their direct listing anticipated to hit the public market
this upcoming week. We’ve talked about them in other videos and I have to say, that based
on the opinions in the comments, this seems to be the most polarizing company we’ve
discussed—a lot of people either love them or hate them. But now that we’re on the
eve of the company going public, I thought it would make sense to take a deeper look
into the company and go over the most up to date information to see if this company makes
sense as one to invest in. But first, I’m Kevin and I want to welcome
you to Healthy, Wealthy, and Wise, the channel that has evolved to talk about all the big,
and not-so big companies going public, whether it’s by a traditional IPO, a SPAC or a direct
listing. And with that evolution in talking about newly available companies to trade,
the channel has really grown. I want to thank everyone that has subscribed and become part
of the community…your interest and support in the channel has been a huge source of motivation
for me. And for those of you here for the first time,
no pressure…watch the video and if you end up liking it, definitely considering subscribing.
By subscribing and turning your notification bell on, you’ll be sure to catch all the
news and analysis on the latest companies going public with our weekly featured show,
IPO This Week. And the information we cover could make sure you don’t miss out on the
next big thing, especially in one of the hottest times for IPOs.
As always, please know upfront that I’m not a financial advisor, and while my videos
are meant to be informative, they should not be seen as a recommendation for you to take
any action on the companies covered—you should always do your own research or consult
with your own financial advisor when making any investment decision.
Okay, let’s get into Palantir, a company with top-secret cred and notoriety, they probably
predicted me making this video! For some background, the company’s full name is Palantir Technologies,
Inc. which actually comes from The Lord of the Rings where the magical palantír were
"seeing-stones" which allowed their users to communicate with each other or to see faraway
parts of the world. The data analytics company, whose headquarters is being moved from Palo
Alto to Denver, was founded in 2003 with their initial mission being to build software for
US intelligence agencies for counterintelligence purposes with their ultimate aim being to
reduce terrorism while preserving civil liberties. To that point, the company has been widely
reported to have helped the US in finding Osama bin Laden. On a more recent note, the
company has been assisting governments during the pandemic in tracking and analyzing the
data on the virus and its spread. Two of the company’s founders are people
with names you might be familiar with. First is Peter Thiel, the current chairmen of Palantir’s
Board of Directors who first became widely known when he co-founded the popular online
payment platform PayPal before taking it public where it eventually was sold to Ebay. Thiel
is also known as having been the first outside investor in Facebook where he initially took
a 10% stake into the company before selling much of it for big money. He does, however,
continue to sit on Facebook’s board of directors, and his name alone no doubt brings investors
to the table of any company he's involved with. The other name you might be familiar
with is Alex Karp, who also is the company’s CEO. Karp and Thiel in particular have an
interesting dynamic, and one that ultimately is why so many people have a strong feeling
about the company one way or another. And that dynamic is political, where Thiel is
a Republican that has been a strong and vocal supporter of President Trump while Karp is
a self-described socialist and progressive who reported that he voted for Hilary Clinton.
And beyond the two men, the company has seen some of its biggest criticism from its work
with developing software for U.S. Immigration and Customs Enforcement, commonly known as
ICE, in which ICE has used Palantir’s software for years to track down undocumented immigrants.
One report specifically revealed that Palantir's software was critical in an operation to arrest
the parents of illegal immigrant children. Now, I bring this up not to talk about politics,
this channel is not about that. I bring it up because it is a company that has been branded
a political company, fair or not, which in the year 2020, probably helps explain the
love or hate views of the company. For the sake of this video, we’re going
to just look at the merits of the company itself in determining if an investment in
it makes sense. So in any discussion of the comments, I hope we can trust each other to
keep that focus. Now it is fair to ask how the election might impact the company financially,
so we will talk about that in a little bit. One other thing to address is the hot button
issue of privacy and data. Privacy concerns are everywhere nowadays in the era of big
tech, and like many companies, there are concerns about how the data on us is being collected
and used. Especially considering how data is being used with ICE to result in a significant
impact on people’s lives. Karp makes a direct point in saying that Palantir has repeatedly
turned down opportunities to sell, collect, or mine data. With that point, he claims that
they act differently than some of the other big tech companies out there.
So that’s the background of the company that catches people’s attention…and we
haven’t even talked about the company’s product yet! So we need to do that…Palantir
currently has two principal software platforms it has developed. The first is named, “Gotham”
and was constructed for analysts at defense and intelligence agencies who didn’t have
the software they needed to do their jobs. Early on in Afghanistan and Iraq, soldiers
were having to map networks of insurgents and makers of roadside bombs by hand. Gotham
was able identify patterns hidden deep within datasets, ranging from: signals, intelligence
sources, and reports from confidential informants— in order to help U.S. and allied military
personnel find what they were looking for. Gotham’s use has now extended beyond intelligence
analysis into defense operations and mission planning.
Later, the company determined that the challenges faced by commercial institutions when it came
to working with data were similar to what governments experience, as companies often
struggle to manage and make sense of the data involved in large projects. And this resulted
in the second platform being developed for these commercial clients and they named it
Foundry. The platform transforms the ways in which organizations interact with information
by creating a central operating system for their data. With the development of Foundry,
the company is trying to get away from the more labor intensive, and therefore more expensive
approach of developing software that is highly customized to each customer, instead trying
to deliver a product that is much more scalable and would amount to a significant savings
in cost for Palantir. And considering the company has yet to have
a profitable year, becoming more efficient in cost needs to be a focus. So let’s now
take a look into the financials that the company is reporting. Most recently, Palantir reported
revenue of $742.5 million in 2019, up 25% from the previous year; and that came alongside
a net loss of $580 million. In the prior year, its sales were $595.4 million with a net loss
of $580 million. Looking more recently, in the first half of this year, Palantir brought
in $481.2 million in revenue and lost $164.7 million which reflects a growth rate of 49%
over the same period last year. Once again, I want to note that the company
has never been profitable since its inception, now 16 to 17 years later. Much of that has
been due to high costs in research and development, as is typical for companies looking to grow
at the scale they're wanting to. Some of the losses are also related to significant executive
and employee compensation; in February, it was reported that cash bonuses for employees
were replaced with restricted stock units as a way to save money. Recent operating results
have shown improvements as their net loss decreased to $164.7 million over the first
half of 2020 which was down from a loss of $280.5 million in the first half of 2019.
Obviously, some of that can be attributed to expenses being lower from the slowdown
caused by the pandemic, although how much isn't clear.
Some other numbers that you might be interested in; for 2019, the average revenue per customer
was $5.6 million, and the average revenue for the top twenty customers, by revenue generated
in 2019, was $24.8 million. The commercial side of their business is growing as 53% of
total revenue came from commercial customers in 2019.
In their S-1 filing, Palantir reports that their software is being used by customers
across 36 industries and in more than 150 countries. As of the first half of this year,
its platforms were used by 125 customers, which obviously is a pretty small number.
Within that number is the US Army whom it actually sued in 2016 over the procurement
process for a new version of an intelligence analysis system claiming that the process
was unlawful and wasteful. Palantir ended up winning the contract, which accounts for
$1.7 billion of the $2.9 billion in potential federal contract money it has won since that
year. As for some of their bigger commercial customers, you can count Airbus and BP near
the top. Now while the company is a getting a lot of
revenue from its top twenty customers, one risk issue is that just three large customers
made up 29%, or almost a third, of its revenue as of June 2020. That includes a single government
customer accounting for 11% of its total revenue in that period. And then you have one large
commercial customer making up an additional 10% of its revenue. A loss of one of these
customers could result in a significant hit to the bottom line.
While looking to grow, the company does have some self-imposed restriction as to who they
will and will not do business with. Palantir states that the company generally does "not
enter into business with customers or governments whose positions or actions they consider inconsistent
with the mission to support Western liberal democracy and its strategic allies.” So
maybe a little piece of mind for anybody that is concerned that they could do business with
an adversary of the US. Palantir says that it plans to grow its revenue
by becoming the default data solution within the U.S. government, further expanding into
the commercial sector, and expanding its reach with existing customers. The company told
its investors in April that they expect to have 1 billion dollars in revenue for 2020.
The company estimates the total addressable market for their software across the commercial
and government sectors around the world would be approximately $119 billion. When considering
the market, they exclude institutions in countries or regions where they have chosen not to sell
their software as I had just mentioned. As far as the market outlook is concerned
on defense IT spending, according to a 2020 market research report cited on thestreet.com,
the global market was an estimated $81.3 billion in 2019 and is expected to reach $98.8 billion
in 2026 which represents a compound annual growth rate of 2.8%.
This expected growth is driven by continued and increasing cyber security threats as well
as changing intergovernmental relationships and regional and global threat estimations.
Palantir plans to go public, as per its most updated filing, on September 29th, almost
a week later than it had originally proposed. The company will list its stock on the New
York Stock Exchange under the ticker PLTR with a direct listing. Even though the rules
have recently changed on direct listings, Palantir is not looking to raise any capital,
therefore, there are no underwriters or proposed pricing. The company states the purpose in
going public is for increased liquidity for its current investors and employees.
If you’ve watched my previous videos on Palantir, you know that there are some interesting
aspects to the company’s plans to go public. The first one is of how the company would
be governed. The filing describes a unique three-class voting structure where Palantir
founders Alex Karp, Stephen Cohen and Peter Thiel will be given a special “Class F”
share that will ensure they hold 49.999999% of the ownership of the company in perpetuity
—meaning that even if they sell the underlying shares, they will still hold that percentage.
So in effect, they could sell their shares and still have a significant ownership stake
in the company. And then it got even more convoluted in the most recent amendments,
where it appears if one of the founders leave the company, their voting power actually increases.
Because of this, a risk factor was added to the filing which states, quote, Although we
currently are not considered to be a “controlled company” under the New York Stock Exchange
corporate governance rules, we may in the future become a controlled company due to
the concentration of voting power among our Founders and their affiliates, end quote.
So to clarify what a “controlled company” is based on New York Stock Exchange corporate
governance rules, it is a company of which more than 50% of the voting power is held
by an individual, group, or another company. While the filing states that the founders
will own 49.999999%, there are scenarios possible that they could have over 50% control. If
that were to happen, public shareholders in the company will likely legally have zero
input into the governance of the company. This structure has really raised eyes and
has resulted in the multiple amendments to the filling which has just resulted in more
confusion. However, in the latest amendment, the filing does state that the stock that
will trade on Sept. 29th will hold only approximately 3.4% of the voting power of the outstanding
capital stock. However, it did add that the founders do have a minimum threshold of shares
they need to hold to keep that 49.99% voting power, although that number is relatively
low. The second unique aspect to this direct listing
is that they will have locked up shares on that first day of trading, which isn’t typical
for companies going the direct listing route. From the CFO, only 20% of existing shares
and options can be traded freely on the first day of trading. For the remaining 80% of shares,
they will become available on the third business day following the release of fiscal year 2020
earnings. As a heads up the fiscal year for Palantir, ends on December 31st. So when this
year’s earnings come out, we could see more volatility in the share price when those 80%
of shares are finally able to hit the market. So with no underwriters and a proposed ranged,
how do we know what the company is valued at and what the share price would be? This
has been a source of contention among potential investors. Well, based on information from
CNBC on past fund-raising efforts in the private markets, the company was valued to be in the
20 billion dollar range. And now when considering the average volume-weighted share price transaction
in the latest quarter of $6.45, investors are now valuing the company at just over $10.5
billion. Looking back to July, Palantir raised $410.5 million by selling shares at $4.75
a piece, according to the filing, which comes out to a valuation of about $7.8 billion.
Transactions during the quarter took place at anywhere from $4.17 a share to $11.50 a
share, suggesting a range of $6.83 billion to $18.8 billion. But again, if you consider
the average transaction was at $6.45, the company was being valued at 10.5 billion dollars,
about half of where it was valued in 2015. Now another example of how these numbers are
all over the place, the Wall Street Journal is expecting the company to be valued around
22 billion dollars when trading begins. These numbers are pointing to the stock trading
in upper single digits to the mid-teens when considering the bump for being publicly traded.
Considering the valuation might help you decide at what price you’re interested at buying
in. Now the elephant in the room is why has the
valuation apparently dropped so much? There are lots of theories from growth being lower
than expected while costs were high and that they have not been very successful in growing
their customer base to a more substantial number.
At the end of the day, the valuation, the product, and growth prospects are what’s
most important to me when considering Palantir as an investment. Being that I’m not an
activist investor looking to take over the company, the company’s governance structure
isn’t a major factor to me, and I would imagine to most of us on the channel. However,
if you’re looking to influence the direction of the company as a shareholder, then Palantir
is not for you. Now we mentioned the politics of the company at the beginning of the video,
everyone has the right to buy or not buy into a company that aligns with your values, so
I’m not going to debate that part of it. But as far as the election is concerned, there
are legitimate questions how the business will do depending on the results. If Donald
Trump wins, as the incumbent, you would expect business doesn’t change much, barring some
major geo-political event. If Joe Biden wins, this obviously is where the questions begin,
mostly because of the notion that Republican administrations spend more on defense than
Democrat ones do. In my opinion, I just don’t believe at the end of the day that there will
be a huge amount of business either lost or gained based on who wins or loses. Could business
related to ICE be negatively affected?...absolutely. But could business be impacted positively
on the pandemic?...absolutely. Do I see spending being cut on anti-terrorism efforts, I don’t,
especially when it comes to the data analytics side of things. Especially if, as Vice President,
Biden saw firsthand that Palantir was critical in the mission of tracking down Bin Laden.
Add to that, in 2010 when Biden credited Palantir for uncovering fraud so there’s evidence
that he’s valued their efforts. I’m just not seeing a major impact to the business
based on the election. But again, that is just my opinion.
But the fact we even have to ask that question shows how important it is for Palantir to
grow revenue outside of the government. And there’s reason to believe that the growth
on the commercial side has been more muted which may be a factor on where the stock was
trading privately. At the end of the day for me it comes down
to 2 big factors, do I think the company can grow the commercial side with Foundry? And
then based on that, what the price of the share is? I need to see more commercial customers
come along for me to be willing to buy the stock at a higher premium. Without that, I
still see a lot of value in the company with their Gotham business and still think it’s
a company to consider, just at a lower price. I do think the potential volatility of this
stock and the downside risk of the stock will be muted out of the gate due to 80% of the
shares being locked up, which as I mentioned is atypical for a direct listing. And that
also leads me to consider waiting for lockup expiration if I think the stock is trading
too high for me at its debut. Now anyone that’s watched me for awhile
knows I won’t tell you what to do or what I expect the price to be since I don’t have
the ability to predict the future. If I could, there’s no other people that I would rather
share that information with other than my community. I just hope to pull in the information
and try to share it with you in an easy to understand manner and share some of my thoughts
on it and I hope you find value in that. Ultimately, I always trust you to know what’s best for
you to do with your money based on your personal thoughts and situation. Hopefully talking
about valuation and how the stock traded on the private markets is something you found
helpful when determining what you think the shares should be worth.
So that’s what I got for you on Palantir. If you’re looking for more information on
the company, you might want to check a replay of the company’s Investor Day live stream
at vimeo.com/palantir. While it’s obviously meant to sell you on the company, you may
enjoy hearing more from the company’s leadership, including Karp,as well as some of their employees.
As for me, I’ll have more for you soon, including the latest IPO This Week episode
where we’ll talk about all the companies that I have scheduled to go public this week.
I hope you enjoyed the video, and if you did, please press that like button and share with
your friends and on any of your social media sites and forums you’re on—anything you
can do to help me grow the channel, will allow me to justify putting more resources towards
it. And again, if you’re new to the channel or just an occasional visitor, we’d love
to have you join the community, it’s totally free, you just gotta press that red subscribe
button…we’d love to have you onboard. Until next time, thank you for watching and
have a great day!