Palantir Stock: U.S.-Centric Exposure to Enterprise AI
Having been investors in Google since their IPO, we became concerned when the company started dipping its toes in politics. When they started hiring “adventure cartoonists” to explain technical concepts, we sensed things were going downhill. Today, the company’s CEO spends his time fighting all the fires being created by the incompetent imbeciles he now regrets hiring who were supposed to be focused on “AI ethics.” Fortunately, we sold our Google shares before this fiasco unfolded, but it’s a warning shot across the bow.
One company that doesn’t let their employees treat the CEO like a bitch on Twitter while airing the company’s dirty laundry is Palantir.
The problems and needs of an organization often change before the software can even be deployed. Our partners require something more. They need generalizable platforms for modeling the world and making decisions. And that is what we have built.Credit: Alexander Karp, CEO and Co-founder of Palantir
The first time we came across Palantir (PLTR) was back in 2016 when they were making acquisitions left and right. Prior to their IPO in September 2020, the company had raised $2.6 billion in funding from names that included Fujitsu, In-Q-Tel, and Founder’s Fund. Some of you may remember when Palantir was purchasing all the property in Silicon Valley during their growth spurt. That’s no longer the case. The company now hails out of Denver Colorado – better weather and less likelihood of being shanked on the way to work.
Palantir Gotham, their first software platform, was constructed for analysts at defense and intelligence agencies. Companies also need to identify patterns hidden deep within datasets, so then they built Palantir Foundry. Palantir Apollo is the continuous delivery software that powers both SaaS platforms. The company presently has 125 customers across 36 industries with average revenue per customer at $5.6 million annually with existing customer contracts averaging 3.6 years in duration.
For 2019, the revenue mix was about 53% commercial and 47% government agencies. We generally look negatively on government entities as key customers because they have all the leverage in the relationship. For example, the U.S. federal government is prohibited from exercising contract options more than one year in advance. Palantir says, “We are working towards becoming the default operating system across the U.S. government.” What happens if the current administration decides that they just don’t want to work with Palantir anymore? The company is mitigating this risk by looking for revenues outside America, with 60% of 2019 revenues coming from abroad, but only with countries seen as America’s allies. Palantir states that they won’t do business with China, a policy that ensures they won’t have any conflicts of interest while working on U.S. government contracts. That’s understandable, but it’s also a limitation they’ve imposed on themselves.
Still, this is such a big total addressable market (TAM) of $119 billion that they’re not even likely to notice if a few countries are put on the blacklist. The benefits of the platform in helping to save costs means it will still sell if there’s a recession, perhaps even better.
An energy supermajor deployed the Palantir suite within hours and within two weeks, they generated $57 million of cash savings and expect to generate $1 billion on an annualized basis.Credit: Palantir Business Update Q3-2020
Enterprise AI Stocks
While previously we were interested in what Palantir does, today we’re more interested in whether or not we want to invest in the stock. The company builds enterprise-strength data analytics tools that consume massive amounts of big data and churn out insights. Taking data and creating value with it is something quite a few AI companies out there do. Using the Nanalyze Disruptive Tech Stock Catalog, we can very quickly see how Palantir compares against other companies dabbling in areas like enterprise AI or robotic process automation (RPA). Here are some revenues and market cap numbers (for stocks with no Q4-2020 earnings report yet – Palantir and Appen – we simply estimated 2020 final earnings using Q3-2020 numbers):
|Market Cap |
|2020 Revenues |
It’s interesting to see how varied revenues and revenue growth are right now among enterprise AI companies. Some, like Palantir, seem unfazed by The Rona. Palantir is one of the largest pure-play enterprise AI software companies out there by market cap and revenues, bringing in nearly $1 billion in revenues for the last four quarters. Compare this to another enterprise AI stock – C3 – which brought in just $157 million in annual revenues over the same time frame. We were also surprised to see Warren Buffet’s Snowflake is 3X the size of Splunk, but brings in just one-tenth of the revenues.
As our methodology dictates, we’re solely interested in avoiding red flags and finding strong revenue growth. All of the above companies have massive total addressable markets they’ve identified and it’s one big land grab. Profitability can come later. We’re already long four stocks in the list, and we’re not going to add a fifth. We already have enough enterprise AI exposure, and we view Palantir’s stance – admirable as it may be – as something that represents a barrier for them along with additional risk. A commitment to only do business with the U.S. and her allies may put Palantir in some difficult situations.
The last thing to note is that not all SaaS companies are built the same. In the case of Palantir and C3, you have a concentrated customer list where each customer’s spend is measured in millions. For other SaaS companies like Splunk or Alteryx, the client lists are measured in thousands. The SaaS models with more customers are more appealing because there’s less customer concentration risk.
The Palantir Stock Offering
We decided to forgo looking at Palantir until the dust settled following their IPO. Unfortunately, the dust still hasn’t settled, and now the Robinhood weekday warriors are toying with the stock and it’s a volatile mess. Palantir stock was up +25% in the last trading day alone, having surged for a number of consecutive days on high volume. The whole thing started when ARK Invest appeared to be backing up the truck on some more shares.
When an active fund manager with large funds decides to make a bet on a particular stock, such price movements are understandable. Aside from ARK being bullish on the stock, there doesn’t seem to be any reason the IPO should be up +225% since it debuted. You’re probably best served waiting until the dust settles. As we often like to do, just dip your toes in the water once there’s some share price consolidation and then add on dips. Yes, it’s much easier said than done.
Based on your political leanings, you’re likely to view Palantir’s patriotic proclamation in a different way. On one hand, that should just be the expectation of every American company out there. On the other hand, they should do business with everyone while adhering to whatever limitations the governments impose on them (which could be exactly that – only do business with us and our allies). Regardless, we see this as an added risk we’re not willing to take, opting instead to stick with the four enterprise AI stocks we’re holding at the moment.
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