Software, Artificial Intelligence, and Data is changing the way we live, with a seemingly unlimited upside. By using all the tools we have available to us, as a human race, our potential becomes bound only by space itself. The stock I am talking about today is marching the human race forward by harnessing the full potential of limitless organized data. Palantir has made several announcements with leading space organizations and government institutions, like the United States Space Force, to exclusively work with them to power their efforts. The power of Palantir is never in question, but what about the investment potential? How far can this investment go?
Palantir, founded in 2003, received its name from the Lord of the Rings which can also be called, “an all powerful seeing stone”. This is suiting, especially as Palantir has built the software of the future. As I dig in, their capabilities never end and it appears that what other software can do, Palantir can do better. But, this article is designed to be future looking. We’ll look on the future of Palantir, the business model and potential investment returns.
Existing Space Partnerships
Palantir recently, in 2021, announced a partnership with Black Sky using Apollo’s (Palantir Software) “Meta-Constellation”. This was unbelievable when I first heard about it. This YouTube video helps give investors an idea about exactly what this means.
Black Sky (BKSY) is a satellite imaging company that specializes in providing global visual intelligence data. Imagine superior advanced eye in the sky technology that can enable governments to see anything in the world at any given time, or a corporate executive team being able to monitor the progress of mission critical construction project from their home office. Palantir’s integration further expands the analytics capabilities of Black Sky’s native platform “Spectra AI”. Basically, Palantir’s artificial intelligence and advanced data capabilities are being used to power western countries and businesses, further closing the gap of universal global intelligence.
Palantir does business with both Government and Private enterprise. Black Sky is a publicly traded company but the future space software doesn’t end there. An expanded partnership was announced this year between Palantir and the United States Air Force and Space Force. Obviously, additional detail and exactly what it will be used for will not be publicly released information but Col. Jennifer Krolikowski said, “Palantir’s technology and framework has truly accelerated our ability to remove data stovepipes throughout the community and create actionable knowledge”. One could speculative this will unify decision making protocols as Palantir is a powerful, all-in-one, solution for key decision makers and boots on the ground stake holders.
Palantir - Business Model
Palantir operates in two business segments, Commercial and Government. Few businesses have such a successful distribution of working with both the public and private sector. The public sector consists of 38% of Q2 FY21 revenue and the government sector consisted of 62% of total revenue for Q2 FY21. Government revenue grew 66% YoY last quarter and commercial revenue grew 90% YoY. There is significant opportunity that exists in both segments. They define future commercial opportunity as, “any large enterprise that operates within a market they work in”. Essentially, they are looking to re-define the standard software for the largest enterprise’s. Within the government, this is more difficult to measure. One could assume it’s a portion of America’s total defense budget in addition to America’s closest allies.
Foundry
Predominately Palantir’s commercial software, it’s the operating system of tomorrow for large enterprises. Businesses have the option to integrate the full power of Palantir or introduce “modules” within their enterprise. For example, this can integrate within a businesses existing supply chain, data visualization (analytics to help leaders make better decisions), energy grids, AI/ML capabilities, cyber security, and much more.
Estimated video time: 30 minutes
If Foundry were to be summed up, it would be the cloud based SaaS portion of their business that can cover many different use cases for a commercial enterprise. It collects data, provides analytics, interprets the data, and runs various different forms of artificial intelligence/machine learning.
A new component of Foundry is the introduction of “Day Zero” companies. Basically, this is composed mostly of Palantir invested companies but these businesses are building on top of Foundry to spearhead innovation and get ahead of competition. The idea is that it provides Palantir a way to demonstrate the power of Foundry by enabling the most innovative, leading, start ups. They leverage Foundry for decision making with the idea is that it produces a faster and more durable long term competitive advantage to enable future success. In essence, data consolidation and decision making is power.
Gotham
Palantir’s first product mostly created to enhance war efforts in the early 2000’s, this is predominately their government product. The power of Gotham is incredibly hard to describe to non-technical (this is me) people. I love that they provide videos like this, below, for us to watch to get an understanding of its capabilities.
Estimated video time: 5 minutes
There are three words that come to mind after watching the video: Sticky, moat, and mission critical. Palantir’s Gotham software quickly becomes mission critical and indispensable to the U.S. and its allies. We’re at a point in the world where it’s no longer who has the biggest gun that will win international conflicts, but who has the best AI and data capabilities. We have Palantir leading this charge for the U.S.
To put context into out Gotham works, making it simple, it is one integrated system that has millions of data points. These data points are collected from users on the ground, or individual devices, and transmitted directly back up to key decision makers as if they were there, on the front lines.
Apollo
Apollo is the life of Palantir Foundry and Gotham. It is the continuous delivery system for both platforms. The uniqueness of Apollo is that it creates the user interface regardless of data infrastructure. What this means is that Palantir Foundry or Gotham can run on-prem, in private clouds, in public clouds, or a hybrid model that incorporates all of them.
In the image above, it paints the perfect picture. Apollo is what the user sees but integrates within all of Gotham’s data points. This means that users can communicate with data located in a cloud, an on-prem data solution and a non data center device/object/location. Apollo powers the interaction of all sources of data. It doesn’t just stop from what’s observable but also powers an AI and process automation component as well.
For example; if a process is deficient within any sort of operational infrastructure, Gotham collects/receives millions of data points on the back end. Apollo, then processes that information for the an operations team to interpret with suggestions, projections and analytics.
Think of the Apollo software as an interactive layer. It enables businesses and governments to not change existing data environments. It all unify’s and communicates on one interface. The importance of this is directly tied to Palantir’s core value offering.
Palantir is meant to be used to solve the worlds most difficult problems, catastrophic events, war and crisis. It’s used as a way to get ahead of all competition, and win.
Financials, Valuations and Potential Return
Palantir is not a cheap stock by any means. If people are wondering how they’ve managed to trade sideways for a year, it has a lot to do with their stock based compensation. Their market-cap has appreciated but the dilution is so high from employee based stock compensation that it’s destroying share holder returns.
Their market-cap is roughly in between $45-$50B with $1.5B in revenue expected this year. Their balance sheet is arguably one of the strongest I have ever seen, with a whopping $2.3B in cash and no debt. They are currently FCF positive but negative earnings. This means the business is generating cash flow and cash from operations but earnings are calculated after any shareholder dilution.
If we were to assume no more dilution from today the valuation metrics are:
FY21 30x EV/S
FY22 22x EV/S
FY23 18x EV/S
FY24 13x EV/S
FY25 10x EV/S
This is assuming a $45B enterprise value. However, there is a problem with this.
Palantir is incredibly hard to value! I think even Wall Street analysts get stuck with this because of how they run their business, it’s not conventional. The only guidance we’ve received from Palantir’s leadership team is “at least 30% YoY growth until 2025”. This is helpful, but not really…
We’re talking about a software company powering the future of space travel, artificial intelligence, and American military intelligence. This is nearly impossible to put a clear value on or even estimate a TAM. It requires a certain degree of speculation, which is exactly why I own it.
The future return is unknowable, Palantir could be a $1T company in the next 20 years which would be a 20x return on a conservative basis. It could be a $1T company in 10 years too, depending on the acceleration of space travel. If we find ourselves in an international war, Palantir would also see a massive influx in revenue as well. The sky is the limit assuming proper execution over time.
Other top-line operating metrics:
Gross Profit: 82%
Contribution Margin: 58%
Adjusted Operating Profit: 31%
Adjusted Free Cash Flow Margin: 28%
I would like to importantly note and direct you to “adjusted operating margin”. After adding back stock based compensation and the taxes associated with this, Palantir is an extremely profitable business model. It’s arguably one of the most profitable business models I have in my portfolio.
Summary
From an investor perspective, it’s difficult to gauge what potential future returns could be. We could see a quick acceleration in revenue during certain periods and we could see Palantir becomes a standard within the next 10 years. With such a profitable business model, I could see years down the road we’d begin seeing stock buy backs. This generates substantial share holder returns not dependent on multiple expansion or speculation. However, they are investing to be in business for years.
The future is unknowable but one can conclude, this is a powerful product and a revolutionary, once in a life time, company.
Can you, the reader, let me know your opinion? Can Palantir 100x from here? Can it be a $5T company?
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Dillon
Great article on a company I've had my eye on. Amazing stuff. Thanks.