Abstract: This article introduces some basic company information of Palantir, as well as the latest market overview, recent developments and some investors’ concerns. Finally, the author makes a brief summary.
Basic information of Palantir
Palantir Technologies Inc is a software service company headquartered in Denver, USA. It is mainly known for providing big data analysis services. Nearly half or more of its customers are government agencies, and the rest are large commercial organizations. The most famous case of Palantir’s product is that they applied big data analysis to help the US military successfully locate and kill Bin Laden.
Current company CEO Alex Karp and other founders including Peter Thiel, Nathan Gettings, Joe Lonsdale and Stephen Cohen co-founded Palantir in 2003.
Palantir’s name comes from the mysterious magic stone in the famous movie Lord of the Rings. This stone could be used in the movie to communicate and saw what was happening in other parts of the world.
Palantir’s main products
Palantir mainly has the following two products:
- Palantir Gotham: A defense operating system (Defense OS), mainly used for counter-terrorism analysis and serving the Department of Defense (DOD) and the United States Intelligence Community (USIC).
- Palantir Foundry: It is an operating system serving modern commercial enterprises. Corporate customers include Morgan Stanley, Fiat Chrysler Automobiles NV and Airbus.
Market overview
Palantir’s U.S. stock code is PLTR, its current share price is US$21.56, and its market capitalization is US$42.21B. The 52-week range is US$8.9-$45. Recently, it has fallen 52% from the high, and has recovered nearly 27% from the low of US$17 in May of this year. The current stock price is close to the recent low.
Source: https://seekingalpha.com/symbol/PLTR/chart
From the perspective of the company’s annual revenue, the past three years from 2018 to 2020 were US$595.41M, US$742.56M, and US$1.09B, respectively, with an average annual compound growth rate of 36%; analysts predict annual revenues of the next two years in 2021 and 2022 are US$1.48B and US$1.92B respectively, the average annual compound growth rate is 33%. This growth rate is not exceptionally high among growth stocks, but the advantage lies in the particularity and uniqueness of the business, it is also difficult for customers to change to other suppliers, and the proportion of government customers is so high that the business is considered very stable. And because the business model is asset-light type, the gross profit margin is as high as 70%. It can be seen that when the business volume is actively expanded, it will not increase a lot of costs. The main cost is human resources, and because big data analysis requires a large number of professional and technical talents, so the company needs to spend more resources to attract and retain employees.
Source: https://seekingalpha.com/symbol/PLTR
Press release of Q1 2021 financial result
Financial figures
Thanks to cutting-edge innovative products and continuous improvement in efficiency and distribution pipelines, Palantir’s first quarter performance was strong. Adjusted free cash flow was US$151M, an increase of US$441M over the same period last year, and revenue increased by 49% to US$341M, adjusted operating income increased to US$117M, exceeding the previous forecast guidance by 45%. Among them, business growth in the United States, including the government and commercial enterprises, is particularly at stake, reaching 81%. The projected annualized revenue of the US business at the end of the first quarter was US$800M.
Palantir’s management stated that they are currently most concerned about two financial figures:
- Free cash flow: This is the company’s ability to actually generate cash. At present, the company has US$441M in cash deposits and generated US$151M in cash flow. The adjusted cash flow margin is 44%. This shows the company’s financial strength.
- Operating income: This is a measure of a company’s net profitability after ignoring stock-based compensation. Its margin is 34%. This shows that as a software company, it can efficiently distribute related products and demonstrate the leverage of a large number of products.
Combining the above two points can prove the company’s profitability and the potential for generating cash flow.
Stock-based compensation
Many investors are very dissatisfied with Palantir’s employee stock-based compensation policy, especially the very high stock-based compensation given to the CEO, which makes a lot of investors worry that their stocks will be greatly diluted.
Regarding this issue, the management explained that the dilution effect of the relevant stock-based compensation on the calculation of the company’s overall stock number is actually very low. So far this year, the number of fully diluted shares has increased by less than 0.2%, so Palantir stressed that it is very low.
Palantir will maintain the discipline of managing stock dilution and believes that stock-based compensation will be normalized in the next few years. At the same time, when combining it with revenue growth, Palantir believes that the company will continue to make good progress in profitability.
Palantir believes that the stock-based compensation policy is very beneficial to the company’s development. Since stock equity can maintain fundamental employees, as an investor of the company, you should be happy to see the company’s employees work hard in the long-term direction to increase the company’s value. So Palantir plans to continue to grant stock equity to employees and provide them with opportunities to share the company’s meaningful advantages in order to maximize the value of the company’s shareholders.
Continuously selling company’s stock by CEO
Palantir’s management explained that CEO Alex Karp, as one of the company’s largest shareholders, has two large option grants that will expire at the end of December this year and cannot be extended. Therefore, when he exercises these options, it creates a very, very large stock position. Therefore, he sold stocks on tax motives.
On the other hand, he will continue to hold a lot of shares issued by the exercise of options, so CEO Alex Karp will continue to be one of the company’s largest shareholders.
To sum up
I believe that many people are just like me. The first impression on Palantir is that they cannot easily figure out what the company’s business really does, what advantages the company has that deserves such a high valuation, and whether the company’s CEO and employees are really worth charging such a high stock-based compensation. This is actually the perception of some institutional investors and analysts. Therefore, for such a company with relatively low transparency, people feel that there is a certain degree of uncertainty. The result is that the stock price highly fluctuates. It can be easily affected by relevant market news. Whenever there is any sudden good or bad news, it can immediately rise sharply, or turn around and fall. To invest in this company, you must have a strong heart; otherwise, to be honest, I think it is quite difficult for ordinary investors to make a lot of money on this stock because you are not likely to hold it for a long period of time, waiting to harvest the company’s development results. What’s more, this CEO and management will not seriously take care of your feelings at all, and the management once said “If you don’t like it, don’t invest in Palantir”. Although it’s not that the company whose CEO holds this attitude is definitely not good, it’s definitely harder for the stock price to develop smoothly.
Anyway, I believe that the company’s technical capabilities and uniqueness are indeed at the leading position in the field of big data analysis, otherwise it would be impossible to continuously attract the cooperation of important US government agencies and some large commercial enterprise customers. Secondly, I believe that after a long period of time say 10 years, big data analysis and applications will play a more important role than today in many different fields such as national defense, aerospace, economics and trade, and the commerical world. Therefore, if you want to invest in big data-related industries in advance, and you are able to control the tolerable risks and bets, I believe Palantir will be a good investment choice in the long run.
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