$Palantir Technologies Inc.(PLTR)$

Palantir builds software platforms that enable institutions to analyze big data sets by transforming them into an integrated data set that reflects their operations.

The company was founded in 2003 with the vision of reducing terrorism while preserving civil libertie.

The company has two main products (Gotham and Foundry) that are powered by a third product (Apollo). Gotham targets governments while Foundry targets commercial institution

Palantir follows a land and expand model that has three phases: acquire, expand and scale. The company also uses partnerships to sell its products in other industries and countries

All of the company's KPIs (number of customers, contribution margin, ARPC…) improved in the most recent quarter

Three of the co-founders still remain in the company after 18 years

Palantir shows strong revenue growth but it is not expected to be profitable in the coming years. Big cash position gives the company optionality

The business was destroying cash but turned CFO and Adjusted FCF positive in the most recent quarter.

Multiclass structure to concentrate voting power around founders. Significant stock dilution in the past year.

There is big growth potential, specially in the commercial segment.

On the downside, the company currently trades at 38 P/S and has significant execution risk with a fairly new sales team.

WHAT PALANTIR DOES AND HOW IT MAKES MONEY

 What the company does

Palantir builds software platforms that enable institutions to analyze big data sets by transforming large amounts of information into an integrated data set that reflects their operations. It basically helps these institutions make data-based decisions. It’s important to note that Palantir does not create or does not sell data, it helps interpret data that already exists. The company currently has the following products: Gotham, foundry and Apollo.

Gotham: it's the company's first software platform (launched in 2008) and it was built for analysts at defense and intelligence agencies. It enables users to identify patterns hidden deep within data sets.

It is used broadly across government agencies although it is also offered to commercial customers, specially those in the financial services industry to fight fraud.

Below you can see more or less how Gotham works. If you want to take a look directly at how this software works, you can do that here but be ready to think you are playing Call of Duty.

Foundry: this software solution was built in 2016 to target commercial institutions with the objective of transforming the ways in which organizations interact with information by creating a central operating system for their data. 

It is basically a data integration and management platform, a suite of analytical tools and an operational platform for business users. The core objective of Foundry is to translate data and models into outputs that human operators can use to make operational decisions. 

The two silos can be two departments of a company where data is not connected by any specific format. What Palantir aims to do is to create “A” with the information of both departments so they can act on the information of the whole company in an integrated data set.

One key characteristic about Foundry is its modularity. Institutions don't need to deploy the whole product, they can't take what they want so it is a very flexible offering.

The advantage of these products is that they are all vertically integrated which allows users to collaborate effectively in the platforms without needing any technical background. These platforms can be used independently or bundled together in a single ecosystem. 

Although these products are top-tier by themselves, the company has built a system that gives these products an edge over those of its competitors (specially over those that are competing for government contracts).

Apollo: it's not a product per se but it was built by the company to power Gotham and Foundry. It’s a continuous delivery system that allows Palantir’s products to run in places where no other SaaS platform can reach such as disconnected environments (drones and submarines) or purpose-built government or classified clouds. Apollo gives Palantir an important edge over other traditional SaaS products that typically run in a single public cloud. 

Another important feature of Apollo is that it enables the company to continuously update the different services included in the platforms (Gotham and Foundry) as it is configured to decide what to upgrade, when to do it and how. Apollo allows Palantir to deploy updates more than 41,000 times a week which enables its users to always have cutting-edge technology while reducing the workload of the company's engineers.

Recently, the company announced the launch of Apollo for Edge AI which enables customers “to train, manage and deploy multiple independently versioned chained models to the Edge with ease”. This is a proprietary technology that will most likely allow the company to act independently from edge providers such as Cloudflare and Fastly. Here you have a good thread to see why this offering is very important for Palantir. 

Another interesting thing that is worth pointing out is that even though the company was founded in 2003, it didn’t sell to its first customer until 2008. So basically this tells you that they had been working on the product for 5 years before even being able to sell it. Alex Karp in an interview said that, during the early life of the company, going public was not an option as they didn’t want to be publicly exposed while developing their platforms. 

There is an ongoing debate between bulls that argue that Palantir is a SaaS company and bears that argue that the company is a services company which will suffer significant margin compression as it grows.

How does Palantir make money?

The company generates revenue from the sale of subscriptions which enable institutions to use their software. These subscriptions come from three main sources:

Palantir Cloud: these subscriptions grant customers the right to access software functionality in a hosted environment controlled by Palantir.

On-premises software: these subscriptions grant customers the right to use Palantir’s software in the customer’s internal hardware infrastructure or on their own cloud instance. 

Both of these services are sold jointly with O&M services which include critical updates and support and maintenance services required to operate the software. 

Professional services: support the customer’s use of the software with on-demand user support, user-interface configuration, training.

Management Quality

In my opinion, Palantir has great potential in its management team. In this section I will talk specifically about Alex Karp, Peter Thiel and Stephen Cohen. These three co-founders still remain in the company and are three great assets of the team in my opinion.

Alex Karp

Alex Karp is one of the founders of Palantir and has been CEO since the company was founded. He is not a usual CEO, he pursued a PhD in Philosophy before founding Palantir and teaches meditation classes in the company from time to time. He converted Palantir into a multibillion company so I think that his track record can’t be questioned. He is quite eccentric, he once said that he is always thinking about Palantir except "when I'm swimming, practicing Qigong or during sexual activity."

This said, there has been plenty of controversy around his figure, especially regarding some of the company’s work with the government and his compensation. His work with the government has brought protests even from employees who didn’t want to sell the platform to the government for illegal immigration purposes. Protesters have even gone to the extent of protesting in front of his house. 

He has been very critical of other tech companies in the US who don’t want to support the government by saying that their “CEOs confuse having a high IQ with being sensible.” He is well known for being critical of Silicon Valley as a whole, especially of those who sell data “without creating real value to customers.” 

He received stock options that placed his compensation in more than $1 billion dollars in 2020 which is kind of crazy. IMHO, I don’t think that such a high compensation is necessary because it is coming at a cost: shareholder dilution. I think that you can like or dislike Alex Karp as a person, but as a CEO I think he has more than a proven track record! Regardless if you agree or disagree with him, he has shown his ideas in a transparent manner in many of the interviews he has done.

Peter Thiel

I could also talk a lot about Peter Thiel but I think that there is not much that I could say that could add value to you. Peter Thiel currently serves as Chairman of the Board and has a more than proven track record of successes managing many companies as well as investing in others such as Facebook and SpaceX.

Stephen Cohen

He is the brain behind Palantir’s software and currently serves as President and Secretary of the company. He stands out to be a very clever guy who had a vision of changing the world since he started his studies at Stanford. He has shown great consistency and determination until coming up with what Palantir would become today. 

He shares an anecdote in this interview where he says that he had to develop a prototype for a meeting with In-Q-Tel’s president and he only had eight weeks to do it. This meeting was in fact what opened the doors of the government to Palantir so we can say that he was one of the building blocks of the company.

In conclusion, I think that the company’s management team is high quality and has a proven track record of success. You might like their ideas more or less but you can’t deny that they are being transparent about what they want to do with the company. The only thing I don't like is the somewhat excessive compensation of Alex Karp.