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2021-04-26

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Palantir Technologies: Valuing A Company Of No Profitability

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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":374022784,"tweetId":"374022784","gmtCreate":1619403356148,"gmtModify":1634273755150,"author":{"id":3565231922969401,"idStr":"3565231922969401","authorId":3565231922969401,"authorIdStr":"3565231922969401","name":"MJ89","avatar":"https://static.tigerbbs.com/51550e2d93895db65c382352cc432f93","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":4,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body>Like and comment thanks!&nbsp;</body></html>","htmlText":"<html><head></head><body>Like and comment thanks!&nbsp;</body></html>","text":"Like and comment thanks!","highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":3,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/374022784","repostId":1109095619,"repostType":4,"repost":{"id":"1109095619","kind":"news","pubTimestamp":1619403046,"share":"https://www.laohu8.com/m/news/1109095619?lang=&edition=full","pubTime":"2021-04-26 10:10","market":"us","language":"en","title":"Palantir Technologies: Valuing A Company Of No Profitability","url":"https://stock-news.laohu8.com/highlight/detail?id=1109095619","media":"seekingalpha","summary":"Palantir presents a good opportunity to value a bubble-like stock with no meaningful company profitability.Palantir’s Government segment is a pipeline for long-term, low-risk deferred income, while the Commercial segment is like a high-margin corporate option waiting to be exercised.At this point, the Commercial segment future growth needs Microsoft, Amazon, or Google ecosystem’s investments much more than Cathie Wood’s investments.At this point, investors value Palantir's growth more than its p","content":"Summary\n<ul>\n <li>Palantir presents a good opportunity to value a bubble-like stock with no meaningful company profitability.</li>\n <li>Palantir’s Government segment is a pipeline for long-term, low-risk deferred income, while the Commercial segment is like a high-margin corporate option waiting to be exercised.</li>\n <li>At this point, the Commercial segment future growth needs Microsoft, Amazon, or Google ecosystem’s investments much more than Cathie Wood’s investments.</li>\n <li>At this point, investors value Palantir's growth more than its profitability.</li>\n <li>As a result, Palantir's shares may be fairly valued between $28 and $33.</li>\n</ul>\n<img src=\"https://static.tigerbbs.com/06e6a347ac17f2da9b9a7761d1c8285f\" tg-width=\"416\" tg-height=\"416\">Photo by Turqay Melikli/iStock via Getty Images\nSince the beginning of COVID, the use of Palantir Technologies’ (NASDAQ: PLTR) (“Palantir”) software for contact tracing has bolstered adoption for supply-chain analysis. It is reasonably expected the product demand will remain a boon beyond the pandemic. Palantir’s products have also been deployed in&nbsp;intelligence gathering,compliance, and risk management after recent state-sponsored cyberattacks, which may remain a company’s low-risk growth from Government segment sales.\nThat being said, with just over&nbsp;100 customers&nbsp;and practically no earnings to speak for, PLTR surged more than 250% in just three months out of the IPO gate. The stock price movement fits the build of a textbook bubble stock. PLTR also gives me a good opportunity to value a young, bubble-like performing stock with no meaningful profitability in sight.\nGovernment Contracts Provide Pipeline Revenue\nPalantir's remaining performance obligations (RPO) and deferred revenue are driven by multiyear government contract (Table 1). Government contracts typically have (1) long sales cycles, (2) lower margin but multiyear terms, and (3) predictable cash flow. But the open bidding process will often keep the government contract margins lower than the commercial contracts. For example, while not reported, I was able to impute that Palantir’s Government segment gross margin is usually around 38% vs. Commercial segment's 56% (Table 2). However, the longer contract periods(3-5 years)and steady revenue serve as a “cash flow pipeline” for young company like Palantir to reduce business risk. For a less than 1-year old IPO, compared with the peers, Palantir has a larger portion (59%) of their revenue from the low-risk, “sticky” government contracts.\nTable 1: Palantir Government Agency Customers (Bloomberg)\n<img src=\"https://static.tigerbbs.com/a3dea5e3a499ea3ef38094a6fa9f5457\" tg-width=\"640\" tg-height=\"291\"><img src=\"https://static.tigerbbs.com/25536f1ac68e71ec9488855a12fd99b9\" tg-width=\"622\" tg-height=\"183\">\nAverage Revenue Per Customer 4 Times of Peers\nThough Palantir still has a niche customer base, the company has done a solid job expanding sales among existing clients. With&nbsp;139&nbsp;customers, its average revenue per customer of $6-$8 million (Figure 1A) in 2020 was about 4-5x above most enterprise-software makers that sell to large corporations (Figure 1B). The average revenue per top 20 customers rose from $25 million to $34 million in a year. Most of the company's government customers have likely standardized their analytics on&nbsp;Palantir's Gotham product, aiding the average contract value. So far, the company has kept&nbsp;a high gross-retention&nbsp;and net-expansion rate in its niche base, of about 139 customers. This is reflected in its large annual-contract values at existing customers, particularly those in the top 20.\n<img src=\"https://static.tigerbbs.com/95816c7695dedfcd8b14fe9798740569\" tg-width=\"640\" tg-height=\"348\"><img src=\"https://static.tigerbbs.com/aee2e5e2cdcb80e125b3d5476371fad8\" tg-width=\"640\" tg-height=\"324\">\nTable 3: Palantir Commercial Customers (Bloomberg Partial List)\n<img src=\"https://static.tigerbbs.com/4ecaf4feeefca0ecc8517f31d6f4b068\" tg-width=\"640\" tg-height=\"369\">\nPalantir's the top-three clients represent about 30% of sales (Table 1), making the company different from the enterprise software peers. Although, government agencies and large defense companies the primary users of its software, the company’s count of customers is still&nbsp;far lowervs. most high-growth cloud software peers (Figure 1D), including ServiceNow (NYSE: NOW) and CrowdStrike (CRWD), which also focus on large enterprises and have some exposure to government customers. Structurally, the company's concentration on government customers creates more risk around a longer sales cycle vs. other software peers. Therefore, Palantir's near-term top-line view may benefit from a strong government demand in big data offerings, the pace of customer additions could improve significantly from the adds of commercial customers which have&nbsp;faster deployments.\nFigure 1D: Customer Counts vs. Peers\n<img src=\"https://static.tigerbbs.com/4dec7cfb29b09a440a8f7e680c202571\" tg-width=\"640\" tg-height=\"379\">\nIn the short term, Palantir's revenue momentum continues to be helped mainly by the Government contract awards, where y/y growth could exceed&nbsp;40%in 4Q (Fig 1A). As a result, Palantir's increased in top-line guidance to&nbsp;44%&nbsp;growth for 2020 from the better-than-expected performance in its Government segment. It should be noted that the company may have enjoyed the short-term predictability of deferred income from government customers. But the heavy concentration on a handful large clients may become serious inherent&nbsp;business risk&nbsp;in the long run.\nPalantir still has a small portion of the revenue contribution from its cloud offering, while Professional services is a much greater portion of the company's sales mix compared with software peers, which use system integrators for implementation work, with services about 5% of total sales (estimated by Bloomberg's&nbsp;Mandeep Singh).\n<img src=\"https://static.tigerbbs.com/f93659452a4478939e69f11843e8e172\" tg-width=\"640\" tg-height=\"317\">\nCommercial Adoptions Drive Sales Momentum\nPretty soon, Palantir’s sustainable growth needs to be produced by an acceleration at the Commercial unit which has the advantage of a shorter sales cycle for Palantir's Foundry product. This demand from the enterprise clients is mainly driven by expanding use cases for supply chains, contract tracing, and cybersecurity, though some of the new, large deals are still with the Pentagon, the U.S. Food and Drug Administration, and Rio Tinto (Table 1).\nIn the last few&nbsp;Demo Days, ramp-up of commercial segment has been an obvious major focus. Management recognizes the urgency to give whatever it got to sustain the 50%-plus overall revenue growth to retain a valuation multiple of over 40x EV-to-forward sales.\nThe company's direct sales-force expansion and use of dedicated account reps could help shorten its sales cycle and boost top-line growth in its Commercial business, where revenue grew only&nbsp;35% vs. 68%&nbsp;in Government. The company realizes that the bottleneck the commercial growth relies on the shorter deployment times and expanding use cases around contract tracing, supply-chain analysis, and cybersecurity. These are key to expansion in industries such as health care. Unlike cloud analytics rivals Snowflake (SNOW) and MongoDB (MDB), Palantir&nbsp;lacks a recurring subscription model.\nPalantir's Commercial segment growth slowed to 4% in the quarter despite multiyear contract wins, likely due to some delay in order closings. The company has a good chance of gaining customers through referrals and shortening its sales cycle given its recent marquee wins at companies including PG&amp;E(NYSE:PCG)and Rio Tinto(NYSE:RIO). However, while the Commercial segment growth is the key to sales momentum, it is limited by the several factors.\nFirst, Palantir does not have a “partner ecosystem or integrators”with other cloud providers. This may make it hard for Palantir to improve its win rates against analytics offerings from pure-play rivals such as Tableau (salesforce.com(NYSE:CRM)) and Qlik, as well as hyperscale-cloud vendors including Microsoft (MSFT) and&nbsp;Amazon.com&nbsp;(NASDAQ:AMZN). In Palantir's demo day, it is clear that its visualization capabilities are superior to other analytics providers such as Snowflake, Splunk (SPLK), and MongoDB. Palantir can leverage its proprietary datasets to shortening deployment times which could help broaden its potential uses and diversify the customer base. But, a lack of deployment options on public clouds such as Amazon AWS may continue to limit Palantir's enterprise adoption. Further, Palantir's addressable market could be limited by its software products' specialized uses around defense, terrorism threats, cybersecurity, and fraud detection. As Palantir expands functionality in its Apollo offering, the company may be able to accelerate sales growth in its Commercial segment (Bloomberg’s Anurag Rana).\nSecond, Palantir's partnerships with system integrators including IBM (IBM) and Fujitsu (OTCPK:FJTSF) will be key to faster growth in its Commercial segment, where the addressable market is likely bigger than its core Government segment. As Palantir has opened up its platform to make it easy for&nbsp;third-party developers&nbsp;to build custom apps, we believe that could help expand uses for its software in areas such as compliance and risk management. The company's recent&nbsp;alliance with IBM&nbsp;may be especially useful for expansion at health-care and financial-services customers, where Palantir could displace legacy analytics offerings fromrivalssuch as SAP&nbsp;(NYSE:SAP), Oracle&nbsp;(NYSE:ORCL), and MicroStrategy&nbsp;(NASDAQ:MSTR).\nThe commercial segment is currently about&nbsp;44%&nbsp;of Palantir's sales, around $482 million in 2020, suggesting plenty of runway given the large market potential for analytics software. With&nbsp;over 50% of RPO recognized&nbsp;as revenue over the next year, the company will need to substantially expand the commercial segment's customer base and shorten its sales cycle to improve pipeline visibility beyond 2021.\nMargin Leveraging Helps But Not Critical\nPalantir’s gross margin and contribution margin have improved to81%and 54% in 2020, aided by the sales growth from higher average revenue per customer and large multiyear contracts (Figure 1B). The Commercial gross-margin profile is 18% better than that of its own Government segment (Table 2). It is also better than other government IT-services providers such as Leidos(NYSE:LDOS),SAIC&nbsp;and&nbsp;CACI(Figure 3).\n<img src=\"https://static.tigerbbs.com/05ebdb3ebc930083aea60ce52d272e6f\" tg-width=\"640\" tg-height=\"263\">\nBut, it trails cloud cybersecurity peers such as CrowdStrike and Zscaler. Palantir's reliance on professional services for deploying its software will likely&nbsp;limit its operating leverage potential.While not disclosed, Palantir&nbsp;may have&nbsp;a higher portion of professional-services sales than cloud peers given the customizations required for deploying its software, which may constrain margin improvement in the next few years.\nForward-looking, Bloomberg's street consensus suggests that gross margin may remain 75-80% in 1Q, but better 81%-85%in 2021 and on (Figure 1B). This may be driven by a higher contribution from its software products vs. professional services. Operating margin, which improved through 1H this year, could be aided by lower marketing expenses. And Q1 may be the first quarter that operating margin may turn profitable over 20% (Figure 1B). The improvement in Palantir's gross and operating margin can be attributed to ”margin leverage” from the acceleration in the company's Government segment sales, where growth doubled from 2019 to 2020 (Figure 2).\n<img src=\"https://static.tigerbbs.com/7c17d6cd584af5045c09f3cbb232ac18\" tg-width=\"640\" tg-height=\"335\">\nWhile expanded hiring and investments in ramping up its direct salesforce may continue to limit margin expansion for the Commercial segment, recent wins at large enterprise customers such as&nbsp;PG&amp;E and Rio Tinto could drive more referral customers, while Palantir's alliances with system integrators such as IBM and Fujitsu may bolster indirect channels sales. Palantir's accelerated pace in new multiyear contracts, including&nbsp;a five-year $89.9 million one&nbsp;with the National Nuclear Security Administration, suggests to us the company's sales cycle is becoming shorter and its go-to-market strategy may be helped by more reference customers. Unlike cloud-software providers that have high revenue predictability amid a recurring subscription model,Bloomberg estimated&nbsp;that Palantir could require at least 40% of sales from new customers to achieve its goal of $4 billion in revenue by 2025.\nRevenue Growth, Not Margins, May Drive Share Valuation\nWithout meaningful profit in sight, it is not realistic to value Palantir’s shares with earnings or cash flow estimates. Since the 2-year old, Denver-based, company needs to “prove” the worth of its government-heavy business model, investors should have and may have watched more of its sales growth than profitability. Previously, Palantir’s IPO valuation was about&nbsp;$18-22 billion&nbsp;at P/S multiple 13-18x, assuming top-line growth of at least 30% next year. This is around the valuation the company received in its last private funding round. From above, the street may think that Palantir could find it hard to sustain top-line growth of over 40% for the next few years (Figure 1A).\nIn the end, consensus suggests that Palantir's near-term revenue growth next two years could be about 27%-45%, a wide range reflecting the uncertainty tied to its reliance on larger deployments at few customers and a longer sales cycle for the company's products vs. other cloud competitors. Top-line growths might taper over the next two to three years from high-40% to low-30%, compared with 40% annual-recurring-revenue growth for cloud peers such as CrowdStrike, Okta (OKTA), and Zscaler (Figure 1A).\nSales Franchise Share Valuation\nBased on the relative importance of sales growth over margin, I elect to use a&nbsp;sales-based model&nbsp;as follows:\nPi= P/S*ix Si\nPiis the value of the segment “i” and P/S*iis the “fair sales multiple” and Siis the segment “i” revenue. The total market capitalization, or stock price per share, is the sum of all the individual segment valuations. (If you are not interested in the technical part of the valuation, please skip this section.)\nIt is important to note that, in contrast to the convention of applying a historical or constant P/S to the valuation, the fair P/S multiple will vary from stock to stock and from time to time. The fair P/S multiple should&nbsp;reflect the expected long-term revenue growth&nbsp;and incremental margin for the stock. On the same token, historical P/S and margin rarely repeat themselves, as most do not have same sales growth and profitability over time. Thus, a fair P/S should be determined by the expected sales growth for the long run. Under this context, I use the Sales Franchise Value Model (SFV) to convert the forward-looking fundamentals into share values:\n<img src=\"https://static.tigerbbs.com/d066940531f136c02e169bd8ea5f3143\" tg-width=\"447\" tg-height=\"221\">\nThe&nbsp;SFV model&nbsp;computes two parts of the stock value. The first part includes the market value for constant growth profitability. The second portion is the excess profit growth over shareholders’ expectations. This is a model to produce a stock valuation which reflects both future revenue growth and margin changes.\nIn estimating the future price-to-sales multiples, I relied mainly on the street forecast financials in Figure 1A and Figure 1B. The gross margins I used range from 80%-84% as predicted by the Street for the next 2 years. The most sensitive factor is the revenue growth rates which are assumed to fluctuate between 9% and 12%, conservatively lower than the Street’s short-term estimates of 27%-45% (Figure 1A). The discount rate has been raised from 12% to 13% to reflect the rising yield effect.\nGiven the various forecasts, the fair value P* for PLTR ranges, theoretically, from $18 to $68. But, it is clear that fair value really does not move that much with margin levels. This somewhat confirms the notion that PLTR share values are not sensitive to profitability or lack of it at this point of time. More interestingly, there is a “reasonable range” of fair value estimates between $24 and $34. Because SFV is a sales growth model, the fair value is much more sensitive to the long-term growth rate assumed.\nAs over 50% of Palantir’s revenue is from the sticky Government contracts with more recent new awards, a 10.5%-11% long-term growth rate seems a reasonably conservative assumption. If you agree with my estimates, the SFV valuation model computes&nbsp;$28-$33&nbsp;fair value range for PLTR (Table 4)\n<img src=\"https://static.tigerbbs.com/05cd4c99631824245ed8b1159d96af74\" tg-width=\"640\" tg-height=\"195\">\nTakeaways\nWith just over 100 customers and practically no earnings to speak for, shares of Palantir Technologies surged more than 250% in just 3 months out of the IPO gate. The erratic stock price movement fits the build of a textbook bubble stock. On one hand, Palantir is blessed by the large revenue contribution from steady multiyear government contracts which serve as a pipeline for long-term low-risk income. On the other hand, Palantir’s growth is limited by the absence of a commercial Cloud ecosystem which is the key for future share appreciation. At this early stage, as the growth opportunity is more important to investors than the company’s profitability, PLTR may be fairly valued between&nbsp;$28-$33.","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Palantir Technologies: Valuing A Company Of No Profitability</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPalantir Technologies: Valuing A Company Of No Profitability\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-04-26 10:10 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4421171-palantir-technologies-stock-pltr-valuing-company-of-no-profitability>seekingalpha</a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\nSummary\n\nPalantir presents a good opportunity to value a bubble-like stock with no meaningful company profitability.\nPalantir’s Government segment is a pipeline for long-term, low-risk deferred income...\n\n<a href=\"https://seekingalpha.com/article/4421171-palantir-technologies-stock-pltr-valuing-company-of-no-profitability\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"PLTR":"Palantir Technologies Inc."},"source_url":"https://seekingalpha.com/article/4421171-palantir-technologies-stock-pltr-valuing-company-of-no-profitability","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1109095619","content_text":"Summary\n\nPalantir presents a good opportunity to value a bubble-like stock with no meaningful company profitability.\nPalantir’s Government segment is a pipeline for long-term, low-risk deferred income, while the Commercial segment is like a high-margin corporate option waiting to be exercised.\nAt this point, the Commercial segment future growth needs Microsoft, Amazon, or Google ecosystem’s investments much more than Cathie Wood’s investments.\nAt this point, investors value Palantir's growth more than its profitability.\nAs a result, Palantir's shares may be fairly valued between $28 and $33.\n\nPhoto by Turqay Melikli/iStock via Getty Images\nSince the beginning of COVID, the use of Palantir Technologies’ (NASDAQ: PLTR) (“Palantir”) software for contact tracing has bolstered adoption for supply-chain analysis. It is reasonably expected the product demand will remain a boon beyond the pandemic. Palantir’s products have also been deployed in intelligence gathering,compliance, and risk management after recent state-sponsored cyberattacks, which may remain a company’s low-risk growth from Government segment sales.\nThat being said, with just over 100 customers and practically no earnings to speak for, PLTR surged more than 250% in just three months out of the IPO gate. The stock price movement fits the build of a textbook bubble stock. PLTR also gives me a good opportunity to value a young, bubble-like performing stock with no meaningful profitability in sight.\nGovernment Contracts Provide Pipeline Revenue\nPalantir's remaining performance obligations (RPO) and deferred revenue are driven by multiyear government contract (Table 1). Government contracts typically have (1) long sales cycles, (2) lower margin but multiyear terms, and (3) predictable cash flow. But the open bidding process will often keep the government contract margins lower than the commercial contracts. For example, while not reported, I was able to impute that Palantir’s Government segment gross margin is usually around 38% vs. Commercial segment's 56% (Table 2). However, the longer contract periods(3-5 years)and steady revenue serve as a “cash flow pipeline” for young company like Palantir to reduce business risk. For a less than 1-year old IPO, compared with the peers, Palantir has a larger portion (59%) of their revenue from the low-risk, “sticky” government contracts.\nTable 1: Palantir Government Agency Customers (Bloomberg)\n\nAverage Revenue Per Customer 4 Times of Peers\nThough Palantir still has a niche customer base, the company has done a solid job expanding sales among existing clients. With 139 customers, its average revenue per customer of $6-$8 million (Figure 1A) in 2020 was about 4-5x above most enterprise-software makers that sell to large corporations (Figure 1B). The average revenue per top 20 customers rose from $25 million to $34 million in a year. Most of the company's government customers have likely standardized their analytics on Palantir's Gotham product, aiding the average contract value. So far, the company has kept a high gross-retention and net-expansion rate in its niche base, of about 139 customers. This is reflected in its large annual-contract values at existing customers, particularly those in the top 20.\n\nTable 3: Palantir Commercial Customers (Bloomberg Partial List)\n\nPalantir's the top-three clients represent about 30% of sales (Table 1), making the company different from the enterprise software peers. Although, government agencies and large defense companies the primary users of its software, the company’s count of customers is still far lowervs. most high-growth cloud software peers (Figure 1D), including ServiceNow (NYSE: NOW) and CrowdStrike (CRWD), which also focus on large enterprises and have some exposure to government customers. Structurally, the company's concentration on government customers creates more risk around a longer sales cycle vs. other software peers. Therefore, Palantir's near-term top-line view may benefit from a strong government demand in big data offerings, the pace of customer additions could improve significantly from the adds of commercial customers which have faster deployments.\nFigure 1D: Customer Counts vs. Peers\n\nIn the short term, Palantir's revenue momentum continues to be helped mainly by the Government contract awards, where y/y growth could exceed 40%in 4Q (Fig 1A). As a result, Palantir's increased in top-line guidance to 44% growth for 2020 from the better-than-expected performance in its Government segment. It should be noted that the company may have enjoyed the short-term predictability of deferred income from government customers. But the heavy concentration on a handful large clients may become serious inherent business risk in the long run.\nPalantir still has a small portion of the revenue contribution from its cloud offering, while Professional services is a much greater portion of the company's sales mix compared with software peers, which use system integrators for implementation work, with services about 5% of total sales (estimated by Bloomberg's Mandeep Singh).\n\nCommercial Adoptions Drive Sales Momentum\nPretty soon, Palantir’s sustainable growth needs to be produced by an acceleration at the Commercial unit which has the advantage of a shorter sales cycle for Palantir's Foundry product. This demand from the enterprise clients is mainly driven by expanding use cases for supply chains, contract tracing, and cybersecurity, though some of the new, large deals are still with the Pentagon, the U.S. Food and Drug Administration, and Rio Tinto (Table 1).\nIn the last few Demo Days, ramp-up of commercial segment has been an obvious major focus. Management recognizes the urgency to give whatever it got to sustain the 50%-plus overall revenue growth to retain a valuation multiple of over 40x EV-to-forward sales.\nThe company's direct sales-force expansion and use of dedicated account reps could help shorten its sales cycle and boost top-line growth in its Commercial business, where revenue grew only 35% vs. 68% in Government. The company realizes that the bottleneck the commercial growth relies on the shorter deployment times and expanding use cases around contract tracing, supply-chain analysis, and cybersecurity. These are key to expansion in industries such as health care. Unlike cloud analytics rivals Snowflake (SNOW) and MongoDB (MDB), Palantir lacks a recurring subscription model.\nPalantir's Commercial segment growth slowed to 4% in the quarter despite multiyear contract wins, likely due to some delay in order closings. The company has a good chance of gaining customers through referrals and shortening its sales cycle given its recent marquee wins at companies including PG&E(NYSE:PCG)and Rio Tinto(NYSE:RIO). However, while the Commercial segment growth is the key to sales momentum, it is limited by the several factors.\nFirst, Palantir does not have a “partner ecosystem or integrators”with other cloud providers. This may make it hard for Palantir to improve its win rates against analytics offerings from pure-play rivals such as Tableau (salesforce.com(NYSE:CRM)) and Qlik, as well as hyperscale-cloud vendors including Microsoft (MSFT) and Amazon.com (NASDAQ:AMZN). In Palantir's demo day, it is clear that its visualization capabilities are superior to other analytics providers such as Snowflake, Splunk (SPLK), and MongoDB. Palantir can leverage its proprietary datasets to shortening deployment times which could help broaden its potential uses and diversify the customer base. But, a lack of deployment options on public clouds such as Amazon AWS may continue to limit Palantir's enterprise adoption. Further, Palantir's addressable market could be limited by its software products' specialized uses around defense, terrorism threats, cybersecurity, and fraud detection. As Palantir expands functionality in its Apollo offering, the company may be able to accelerate sales growth in its Commercial segment (Bloomberg’s Anurag Rana).\nSecond, Palantir's partnerships with system integrators including IBM (IBM) and Fujitsu (OTCPK:FJTSF) will be key to faster growth in its Commercial segment, where the addressable market is likely bigger than its core Government segment. As Palantir has opened up its platform to make it easy for third-party developers to build custom apps, we believe that could help expand uses for its software in areas such as compliance and risk management. The company's recent alliance with IBM may be especially useful for expansion at health-care and financial-services customers, where Palantir could displace legacy analytics offerings fromrivalssuch as SAP (NYSE:SAP), Oracle (NYSE:ORCL), and MicroStrategy (NASDAQ:MSTR).\nThe commercial segment is currently about 44% of Palantir's sales, around $482 million in 2020, suggesting plenty of runway given the large market potential for analytics software. With over 50% of RPO recognized as revenue over the next year, the company will need to substantially expand the commercial segment's customer base and shorten its sales cycle to improve pipeline visibility beyond 2021.\nMargin Leveraging Helps But Not Critical\nPalantir’s gross margin and contribution margin have improved to81%and 54% in 2020, aided by the sales growth from higher average revenue per customer and large multiyear contracts (Figure 1B). The Commercial gross-margin profile is 18% better than that of its own Government segment (Table 2). It is also better than other government IT-services providers such as Leidos(NYSE:LDOS),SAIC and CACI(Figure 3).\n\nBut, it trails cloud cybersecurity peers such as CrowdStrike and Zscaler. Palantir's reliance on professional services for deploying its software will likely limit its operating leverage potential.While not disclosed, Palantir may have a higher portion of professional-services sales than cloud peers given the customizations required for deploying its software, which may constrain margin improvement in the next few years.\nForward-looking, Bloomberg's street consensus suggests that gross margin may remain 75-80% in 1Q, but better 81%-85%in 2021 and on (Figure 1B). This may be driven by a higher contribution from its software products vs. professional services. Operating margin, which improved through 1H this year, could be aided by lower marketing expenses. And Q1 may be the first quarter that operating margin may turn profitable over 20% (Figure 1B). The improvement in Palantir's gross and operating margin can be attributed to ”margin leverage” from the acceleration in the company's Government segment sales, where growth doubled from 2019 to 2020 (Figure 2).\n\nWhile expanded hiring and investments in ramping up its direct salesforce may continue to limit margin expansion for the Commercial segment, recent wins at large enterprise customers such as PG&E and Rio Tinto could drive more referral customers, while Palantir's alliances with system integrators such as IBM and Fujitsu may bolster indirect channels sales. Palantir's accelerated pace in new multiyear contracts, including a five-year $89.9 million one with the National Nuclear Security Administration, suggests to us the company's sales cycle is becoming shorter and its go-to-market strategy may be helped by more reference customers. Unlike cloud-software providers that have high revenue predictability amid a recurring subscription model,Bloomberg estimated that Palantir could require at least 40% of sales from new customers to achieve its goal of $4 billion in revenue by 2025.\nRevenue Growth, Not Margins, May Drive Share Valuation\nWithout meaningful profit in sight, it is not realistic to value Palantir’s shares with earnings or cash flow estimates. Since the 2-year old, Denver-based, company needs to “prove” the worth of its government-heavy business model, investors should have and may have watched more of its sales growth than profitability. Previously, Palantir’s IPO valuation was about $18-22 billion at P/S multiple 13-18x, assuming top-line growth of at least 30% next year. This is around the valuation the company received in its last private funding round. From above, the street may think that Palantir could find it hard to sustain top-line growth of over 40% for the next few years (Figure 1A).\nIn the end, consensus suggests that Palantir's near-term revenue growth next two years could be about 27%-45%, a wide range reflecting the uncertainty tied to its reliance on larger deployments at few customers and a longer sales cycle for the company's products vs. other cloud competitors. Top-line growths might taper over the next two to three years from high-40% to low-30%, compared with 40% annual-recurring-revenue growth for cloud peers such as CrowdStrike, Okta (OKTA), and Zscaler (Figure 1A).\nSales Franchise Share Valuation\nBased on the relative importance of sales growth over margin, I elect to use a sales-based model as follows:\nPi= P/S*ix Si\nPiis the value of the segment “i” and P/S*iis the “fair sales multiple” and Siis the segment “i” revenue. The total market capitalization, or stock price per share, is the sum of all the individual segment valuations. (If you are not interested in the technical part of the valuation, please skip this section.)\nIt is important to note that, in contrast to the convention of applying a historical or constant P/S to the valuation, the fair P/S multiple will vary from stock to stock and from time to time. The fair P/S multiple should reflect the expected long-term revenue growth and incremental margin for the stock. On the same token, historical P/S and margin rarely repeat themselves, as most do not have same sales growth and profitability over time. Thus, a fair P/S should be determined by the expected sales growth for the long run. Under this context, I use the Sales Franchise Value Model (SFV) to convert the forward-looking fundamentals into share values:\n\nThe SFV model computes two parts of the stock value. The first part includes the market value for constant growth profitability. The second portion is the excess profit growth over shareholders’ expectations. This is a model to produce a stock valuation which reflects both future revenue growth and margin changes.\nIn estimating the future price-to-sales multiples, I relied mainly on the street forecast financials in Figure 1A and Figure 1B. The gross margins I used range from 80%-84% as predicted by the Street for the next 2 years. The most sensitive factor is the revenue growth rates which are assumed to fluctuate between 9% and 12%, conservatively lower than the Street’s short-term estimates of 27%-45% (Figure 1A). The discount rate has been raised from 12% to 13% to reflect the rising yield effect.\nGiven the various forecasts, the fair value P* for PLTR ranges, theoretically, from $18 to $68. But, it is clear that fair value really does not move that much with margin levels. This somewhat confirms the notion that PLTR share values are not sensitive to profitability or lack of it at this point of time. More interestingly, there is a “reasonable range” of fair value estimates between $24 and $34. Because SFV is a sales growth model, the fair value is much more sensitive to the long-term growth rate assumed.\nAs over 50% of Palantir’s revenue is from the sticky Government contracts with more recent new awards, a 10.5%-11% long-term growth rate seems a reasonably conservative assumption. If you agree with my estimates, the SFV valuation model computes $28-$33 fair value range for PLTR (Table 4)\n\nTakeaways\nWith just over 100 customers and practically no earnings to speak for, shares of Palantir Technologies surged more than 250% in just 3 months out of the IPO gate. The erratic stock price movement fits the build of a textbook bubble stock. On one hand, Palantir is blessed by the large revenue contribution from steady multiyear government contracts which serve as a pipeline for long-term low-risk income. On the other hand, Palantir’s growth is limited by the absence of a commercial Cloud ecosystem which is the key for future share appreciation. At this early stage, as the growth opportunity is more important to investors than the company’s profitability, PLTR may be fairly valued between $28-$33.","news_type":1},"isVote":1,"tweetType":1,"viewCount":86,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":21,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/374022784"}