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Palantir Is Only Just Getting Started May 19, 2021 7:45 AM ET Palantir Technologies Inc. (PLTR) Summary
•§Palantir's quarterly earnings demonstrated that the big data firm is nowhere near saturation yet and still has a long growth runway ahead.
•§Its total addressable market along with powerful network effects and economies will convert into massive future profitability.
•§After falling nearly 50% from all-time highs, Palantir is now much more attractively valued and leaves plenty of upside potential.
•§Looking for more investing ideas like this one? Get them exclusively at Undervalued Growth. Learn Overview To the surprise of many, Palantir (PLTR) debuted on the public markets in September of 2020. As with most of Peter Thiel's brainchildren, Palantir's etymological origins stem from a Lord of the Rings artifact: seeing stones that enable an observer to see across realms, the past, and the future. This visibility, however, has been aggressively one-sided, as the company has been shrouded in mystique throughout its 17-year history. Some narratives have tended to exaggerate the company's far-reaching abilities, others have underestimated their skills, and no shortage of these have blatantly missed the mark. The truth, it so happens, is neither here nor there, but rather somewhere in between. Since going public, we've been afforded a much more intimate view of a company that is as enigmatic as it is fascinating. What's more, it is almost as if Palantir kicked into gear upon opening its books, giving it the necessary impetus to morph into what urban legends already had most of us believing years prior. This rosy portrait, however, is not without its faults. Palantir's business practices and associations are worthy of their own discussion, not unlike the heated debates that characterized Karp and Thiel's time at Stanford Law School. Upon closer inspection, though, Palantir's business model is increasingly necessary in a world that has failed to keep up with the exponential rise of technology and the fall of privacy along with it. Regardless, we'll steer clear of the politics—for the most part—and center on why Palantir is an excellent company, delve into its financials, valuation, and future prospects. What does Palantir do? Palantir is in the business of processing hoards of data and yielding actionable insights. Put simply: it looks for needles across millions of haystacks. Never before has humanity produced such vast quantities of data, and the integration supplied by Palantir is transformative, helping its client make better (often lethal) decisions. The company has two main software platforms: Gotham and Foundry. As defined by the company's S-1:
•§Gotham: "We built Gotham, our first platform, for government operatives in the defense and intelligence sectors. The platform enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants. It also facilitates the handoff between analysts and operational users, helping operators plan and execute real-world responses to threats that have been identified within the platform. Gotham is now used broadly across government functions."
•§Foundry: "Foundry transforms the ways organizations operate by creating a central operating system for their data. Individual users can integrate and analyze the data they need in one place. All of our commercial sector customers now use Foundry, as do several of our government customers." Palantir And Bitcoin Palantir: Risky And Expensive The company has outgrown its defense origins without losing sight of its mission to "support the West." While the company refuses to do business with countries adversarial to the US, it has broadened its reach within the commercial sector, catering to investment banks, pharmaceutical companies, and Formula 1 teams. Further, its software might well have been deemed the original blockchain, as it leaves an audit trail across any sort of interaction with the data. "[An IPO would make] running a company like ours very difficult" -Alexander Karp - CEO (2013) One particularly memorable example is the tangible benefits it provided to Airbus back in 2016. In merging 25 data silos related to production of the A350 and integrating more than 400 sets of data, Palantir realized hundreds of millions of dollars in cost savings. Production mistakes were fixed in ~41% less time thanks to Palantir's results, and former Airbus chief executive describes bringing them on as "one of the best decisions of my career." The agility of its software was put to the test during the battle versus COVID-19. Three weeks into the pandemic, Palantir merged more than two billion data elements related to the outbreak, generating tables, graphs, heat maps, AI models, histograms, and more in an elegant, easily digestible interface. Now, much has been said about identity: is it a SaaS company or a technology consulting firm? It is, in fact, both. Its "forward-deployed engineers" strategy enables clients to customize the software to their needs resembles a bespoke consulting firm. Yet, in uncovering product needs on a specific basis, Palantir can then leverage its technology to offer a general SaaS offering across its existing and prospective client base. At year-end 2019, moreover, the company had invested over $1.5B in R&D since 2008, accentuating its commitment to developing first-class software. Though we don't yet know the exact product breakdown by customer, Gotham's eight and Foundry's eleven different offerings highlight a growing list of use cases. Make no mistake, Palantir would identify as a hot dog stand if need be. As an illustration of this, look no further than its 2016 lawsuit against the US Army. In 1994, Section 2377 of the Federal Acquisition Streamlining Act ("FASA") was passed. The implication was that the government would have to consider contracting commercially available software rather than looking for a tailor-made product. In an unequivocal brazenness that characterizes the entirety of its prospectus, Palantir argued that this law had largely been ignored for decades. Further, the company contends that though soldiers often requested the use of its software, their requests were squashed by the government. Well, in challenging the Army's decision to pursue a software development contract for the replacement of its battlefield intelligence system, Palantir singlehandedly expanded its own TAM in selling to the government. This ruling held up in the US Court of Appeals during 2018, paving the way for Palantir to compensate for its historically stagnant growth, as evidenced below. No wonder they labeled this section "leveling the playing field." Source: Palantir S-1 Arguably, though, it has fundamentally shifted the market dynamics of the selling to the government, displacing complacent incumbents with Palantir's superior software. Palantir's big legal win will provide it with a value unlock that will serve as a tailwind for years to come. The term "government" serves merely as an umbrella term, as it's worth noting the variety of civilian departments and agencies who have contracted PLTR's services, such as the IRS, the SEC, and the CDC. On a YoY basis, government revenue grew by 76%, driven in large part by 83% in the US government business. Business Model Palantir plays the long game. It'll happily absorb short-term losses as a means of securing a long-term contract, lest we forget its inherent costliness: $10 million to $100 million annually. The company has three phases through which it classifies its relationships with current or prospective customers.
•§Acquire: This first phase entails courting potential new customers with short-term pilots at little to no cost to them. These accounts are operated at a loss, but Palantir is stringent in its belief that such is the approach to drive future growth. A customer for which Palantir has recognized less than $100k in revenue is classified in this phase. As of 1Q'2021, active commercial pilots have more than doubled on a YOY basis.
•§Expand: The Expand phase consists of Palantir fitting the customer with the software that actually delivers and solves their pressing needs. Customers in this book will have spent more than $100k in a calendar year and have most likely entered into a multi-year contract.
•§Scale: The key for the scale phase is that it considers customers for which more than $100k in revenue has been recognized, wherein the account had a positive contribution margin during the year at issue. As customers achieve maturity, they are (literally) left to their own devices. The increased platform usage both extracts more value for the customer while simultaneously locking them into Palantir further and further. Consequently, the switching costs become almost unfathomable, and that dependence in and of itself pays off the company's initial losses many times over. At the end of 2020, it grew revenue and generated positive contribution margins across all three phases, as shown below.
1Q'2021: Approaching Financial Excellence While initial skepticism was understandably warranted, Palantir's blowout first quarter made great strides in its effort to silence its critics. Most unprofitable metrics were flipped altogether, not least its operating income and adjusted free cash flow, signaling that profitability is almost within reach. A YoY 248% in billings—ascending to $362M—resulted in higher than expected cash flow. Across the board, the company exceeded even its own expectations. COVID has been an admittedly positive tailwind, but one could be mistaken for thinking that this sleeping giant was merely waiting on its public debut to turn on the afterburners. Though the metamorphosis is far from complete, the company is well on track to become the high-flying behemoth it was originally billed to be. Its high growth SaaS metrics are mostly best-in-class, whereas prior performance bordered on below average. Much of its growth has been buoyed by a mammoth 81% YoY increase in US revenue. And just this recent quarter, the company was awarded a five-year contract with a total value of $89.9M by the National Nuclear Security Administration to provide the operational platform for the SAFER project. Moreover, Palantir has an $800M annualized revenue run rate from US customers alone as of 1Q'2021, or 73% of full-year 2020 revenue and more than any other year prior. The thing with Palantir is that some of its previous growth was attributed to recognizing deferred revenue. In other words, reported revenue and earnings were, as Swedish society increasingly is, cashless. What is remarkable is that in a mere couple of quarters, that has all changed for the better. An inflow of $118M on $341 of revenue is outstanding, while a meager $700k in CapEx rounded out a fantastic quarter. If anything, this points to management's increased focus on fundamentals and getting the company to where it truly belongs. It helps to appreciate Palantir through the prism of volatility. As the past year has shown, the digital age has been brought forward at an accelerating rate, and with it a slew of accompanying threats to which most are not well-equipped to face. While the coronavirus ravaged the physical world, the digital pandemic took shape in the form of multiple attacks that even mobilized the full extent of the American government's resources. CrowdStrike (CRWD) is a perfect example in that the legacy modus operandi for companies is far from obsolete. Not only is it more expensive to develop your IT system infrastructure in-house in the long-term, but it is also less potent in warding off threats; it is laughably predictable in nature, whereas malware has become increasingly adaptive and unforeseen. It is a counterintuitive notion, but companies are better off outsourcing these facets of their business that could mean life or death to an entity that is specifically versed in staying ahead of the curve. The benefits of scale cannot be underestimated, and Palantir is poised to capitalize on this trend on both the government and commercial front. As a vaccinated Karp resumes his worldly travels luring prospective customers, Palantir is sure to supersede what was a great year for the business but one depressed for enterprise software as a whole. It is no accident that, at the time of Palantir's IPO, sales amounted to 3% of headcount — Karp is a fundamental component of the Palantir thesis. Valuation Virtually no stock has been spared from the market pullback of recent weeks. In our view, there is a marked dissonance between the company's spectacular quarterly results with the stock's behavior leading up to and after the announcement. Most investors can agree on the simple fact that the company was far too cheap to begin with. However, the last few months have brought it back down to earth from its ATHs of $39, implying a market cap of ~$71B. Market euphoria certainly got it ahead of itself, but we remain bullish for long-term investors that the company is indeed heading up and to the right.
Multiples 9/30/20 12/31/20 3/31/21 5/17/21§ Forward Multiples NTM Total Enterprise Value / Revenues 29.95 27.97 23.07 NTM Total Enterprise Value / EBITDA 157.06 115.69 92.53 NTM Total Enterprise Value / EBIT 187.58 122.79 96.36 NTM Price / Normalized Earnings 218.06 148.07 126.77 NTM Market Cap / Free Cash Flow 906.66 334.49 (8,127.47) NTM Price / Cash Flow Per Share 261.67 332.71 160.47 Trailing Multiples LTM Total Enterprise Value / Revenues 16.82 36.08 33.94 30.31 LTM Total Enterprise Value / EBITDA (14.91) (33.99) (33.98) (30.34) LTM Total Enterprise Value / EBIT (14.74) (33.59) (33.60) (30.01) LTM Price / Diluted EPS Before Extra (7.22) (19.63) (24.19) (21.25) LTM Price / Book Value per Share 6.87 27.28 23.99 21.08 LTM Price / Tangible Book Value per Share 6.87 27.28 23.99 21.08 LTM Total Enterprise Value / Unlevered Free Cash Flow 143.97 149.31 LTM Market Cap / Levered Free Cash Flow 154.82 160.16 Price Factors
Price 9.50 23.55 23.29 20.46§ Total Enterprise Value (MM) 16,816.48 39,422.74 40,886.14 36,511.52 Market Cap (MM) 15,673.10 41,025.17 42,440.61 38,398.23 Forward Factors NTM Revenues 0.00 1,316.28 1,461.87 1,582.75 NTM EBITDA 0.00 251.00 353.40 394.58 NTM EBIT 0.00 210.17 332.97 378.91 NTM Normalized Earnings Per Share 0.00 0.11 0.16 0.16 NTM Free Cash Flow 0.00 45.25 126.88 -4.72 NTM Cash Flow Per Share 0.00 0.09 0.07 0.13 Trailing Factors LTM Revenues 999.94 1,092.67 1,204.58 1,204.58 LTM EBITDA -1,128.04 -1,159.81 -1,203.40 -1,203.40 LTM EBIT -1,141.15 -1,173.68 -1,216.83 -1,216.83 LTM Diluted EPS Before Extra -1.32 -1.20 -0.96 -0.96 LTM Book Value per Share 1.38 0.86 0.97 0.97 LTM Tangible Book Value per Share 1.38 0.86 0.97 0.97 LTM Unlevered Free Cash Flow 0.00 273.83 0.00 0.00 LTM Levered Free Cash Flow 0.00 264.99 0.00 0.00 While some of these multiples might look pricey, it's worth paying attention to a couple of wall street darlings such as Shopify (SHOP) at EV/Revenue = 37x and EV/EBITDA = 301x. The moral of the story? It's more a matter of market consensus than anything else going forward. Recent multiple contraction is a healthy way for most companies to digest the unprecedented gains achieved during 2020. In terms of looking ahead, however, Palantir possesses all the right ingredients to reward those willing to weather the storm of a market that is yet to appreciate the business model. We consider PLTR to be attractively priced and one worth adding onto continuously if afforded the opportunity to do so throughout the years. This is certainly no meme stock, and investors who lazily buy into that narrative without doing their own DD risk missing out on a multi-year compounder poised to dominate the next decade and beyond in enterprise software. The company has guided conservatively for the rest of the year and is sure to capitalize on a growing list of clients in need of robust analytics. With over $2.8B in total remaining deal value and an average contract duration of ~4 years, coupled with over $2B in dry powder, the future looks bright for Palantir. Final Thoughts Palantir's history and nuance are almost as complex as the software it develops. It is nonetheless crucial to understand the company's history and context in order to garner an appreciation of the long-term mindset that has permeated its culture since its inception. Palantir has woken from a nearly twenty-year slumber and transformed into a state-of-the-art SaaS company that is truly unique in its value proposition. No other company (that we know of) is directly comparable. Regulatory tailwinds abound as the company benefits from becoming the go-to provider for agencies and governments worldwide. Finally, the degree to which the three original founders continue to possess skin-in-the-game represents one of the most positive leading indicators going forward. We'll leave with one simple, closing remark through which the company's S-1 captured what an entire article might well have not: "The stakes are high." Undervalued Growth Stocks With Undervalued Growth, you gain access to under-the-radar growth stocks with explosive upside potential. We consistently screen thousands of stocks to find the most undervalued growth stocks in the market. As a member, you will gain exclusive access to:
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