Palantir- 2019 to 2020

 

Recently, Palantir has been getting a lot of eyes on it. This has been for both good and bad reasons. As a company that mainly handled government clients for more than a decade, they have aided quite a few controversial bodies, such as ICE- U.S. Immigration and Customs Enforcement, the CIA- Central Intelligence Agency, and the NSA- National Security Agency.

However, tech giants like Amazon and IBM have recognized Palantir’s abilities and have partnered with them to improve and expand on their AWS and Watson services respectively. Now before talking about Palantir’s recent financial performance, it’s important to talk about it’s past, so that we can better map out its future.

Palantir was founded in 2003 by Peter Thiel, Nathan Gettings, Alex Karp, Joe Lonsdale & Stephen Cohen. The company’s main function is to make software that integrates large volumes of data into a central platform so that it can be analyzed. For a majority of its life, Palantir served the United States Intelligence Community (USIC) until around 2012 when they first expanded to serve commercial clients. Commercial clients which include BP, Airbus, Ford Chrysler and RBC (Royal Bank of Canada), among other notable clients. It took 17 years for them to develop their primary software for the USIC and the Department of Defense, which ended up becoming Gotham. Gotham is notable for being used by the USIC and the DoD for counter-terrorism analytics and at the Recovery Accountability and Transparency Board. On the basis of Gotham, Foundry- Palantir’s commercial-use software, was developed. Notable uses of Foundry are seen with Airbus’s Skywise software which “allows major shareholders in the aviation industry to prevent maintenance, achieve better fuel efficiency, and optimize their team’s time”. Palantir’s partnership with Airbus has expanded to reach 9000+ aircrafts and 130+ airlines.

 

The main issue that is brought up when discussing Palantir’s stock is what kind of company Palantir is. Both bears and bulls have been butting heads over whether Palantir is a consultancy company or a disruptive AI company akin to Snowflake. The reason why this distinction is so significant is because it helps determine the price-to-sales ratio (P/S Ratio). If considered a consultancy company than Palantir’s current P/S ratio of 24.01 is extremely overvalued, as the P/S for consultancy firms hover around 3-4x. Whereas, if it were a disruptive AI company, you could use the example of Snowflake which has a P/S ratio of around 96.72 currently. Thus, depending on who you ask, Palantir can either be a greatly overvalued or a greatly undervalued company, thus bringing some conflict.

 

To talk purely about Palantir’s financials, it can be seen that they have grown quite substantially in numerous aspects from 2019 to 2020. In terms of revenue growth, they have grown from around $742.6 million to around $1.1 billion in 2020.  This is even more impressive given the fact that 2020 was a harsh year for numerous businesses due to the COVID-19 pandemic. Moreover, total liabilities have fallen by about $300 million from $1.44 billion to $1.16 billion. Total Debt has also fallen by about $200 million from $397 million to $196 million. A very noticeable change is the nearly double increase of R&D from $305.6 million to $560.7 million, this has resulted in a large increase in operating expenses from about $1.073 billion to $1.913 billion. This huge increase in expenses is also a result of significant increases in SG&A and marketing costs. Reasoning for such ballooning costs can be attributed to their shift in stance for a push in sales and marketing, as before the company took the stance of the product selling itself, to now adding a traditional sales and marketing team to help sell the product.  This increase can also be attributed to the costs associated with planning and executing their direct listing.

 

With their recent expansion into the commercial sector starting in 2012, they have diversified their client base to serve about 16 different industries. “We have built lasting and significant customer relationships with some of the world’s leading government institutions and companies. Our average revenue per customer in the nine months ended September 30,2020 was $5.8million, which grew 38% from $4.2 million per customer in the nine months ended September 30, 2019. Our top twenty customers, based on our revenue in the nine months ended September 30, 2020, generated $471.1 million in revenue, or 61% of our total revenue in that period. From those top twenty customers, we generated an average revenue per customer of $23.6 million during the nine months ended September 30, 2020, which grew 36% from $17.4 million per customer in the nine months ended September 30, 2019. "This quote shows that all their customers are spending more on average for their services, proving that they find Palantir’s service highly valuable. For their most valuable clients (their top twenty), they spent an increasingly higher amount for their service, a good indicator that they have successfully hooked their most valuable clients and have a consistent stream of revenue. However, 61% of their revenue coming from their top twenty clients can be seen as a lack of diversified revenue streams, which is an issue that Palantir has been working on as of recently.

 

“We expanded into the commercial sector in recent years. In the three months ended September 30, 2020., 44% of our revenue came from commercial customers and 56% came from government agencies. In the nine months ended September 30, 2020, 45% of our revenue came from commercial customers and 55% came from government agencies."As can be seen in this quote, Palantir have been slowly transitioning away from mainly government clients and now offering their services to more and more commercial clients. With this slow, but steady transition it is apparent that they are working on diversifying their client base and possibly in the not so distant future that they'll have a majority of their business serve a wide array of commercial clients.