Silicon’s Valley most secretive company may be going public this year.
Should you buy Palantir Technologies stock?
Big data cruncher Palantir Technologies is one of Silicon Valley’s most secretive and controversial companies: CIA financing, counter-terrorism operations leading to Osama Bin Laden’s capture and facilitating the deportation of illegal immigrants have all contributed to the firm’s nefarious image.
Earlier this month, Palantir Technologies confidentially filed for an IPO. Confidential IPO filings do not require that companies disclose traditional information such as financial figures and potential risks, instead allowing them to “withhold sensitive information from competitors, customers, and employees until much further down the road; in some cases, it even gives the option to withdraw a registrations statement without alerting the public“.
The confidential filing means Palantir can explore the possibility of going public without being subject to intense scrutiny which could compromise its business model and clients.
Palantir was founded in 2003 to assist the CIA and the Pentagon analyze data that would help track and trap terrorists. The name Palantir comes from the Palantíri in Lord of the Rings’, the seeing-stones which allow users to see what is going on in any parts of the world and communicate with anyone else looking into such a stone. As such, Palantir is aptly named because it provides real-time analytics which can be shared with other Palantir users.
In-Q-Tel, the CIA’s venture capital branch, was one of Palantir’s earliest investors and its only customer for several years. The software proved so popular that other government agencies started using it. Today, Palantir has approximately 2,500 employees, mostly engineers and PHDs, who design tailor-made software solutions to collect and interpret data in a coherent way.
What exactly does Palantir Technologies do?
Palantir’s website claims it “builds the world’s leading software for data-driven decisions and operations” to “break down barriers between data and decisions” and help organizations “improve how they operate“.
Basically, the software aggregates, searches, sorts, and analyzes data to identify keywords, patterns and connections that can help make better decisions. The software searches for connections that human analysts might miss. For example, it will scan telephone records, social media posts, financial documents, flight logs, criminal records – and present links in easy to interpret spider-web like graphics.
The software can establish connections between people: It will display links such as “colleague of”, “lives with”, “sibling of” and even “lover of”. These ties are very useful when it comes to investigating who knows who, who did what and who may be up to what. Palantir claims these features help police departments and intelligence services fight crime in real time.
Here’s one practical example of what Palantir can do: A suspected terrorist buys an airplane ticket to Florida, rents a condo, withdraws money from several different ATMs, calls Afghanistan twice and is filmed visiting Disney World by the park’s security cameras. Taken individually, each action appears insignificant. However, when combined, the CIA may discover and prevent a plot to bomb the theme park.
The software also has different permission levels so employees, clients and partners can be granted varying levels of access based on how much they need to know. For example, I can grant internal user A access to database 1, internal user B access to databases 1-2-3 and external user C access only to database 3. This way, sensitive information is not made available to those who have no business consulting it. This is crucial when it comes to managing sensitive intelligence data.
Webs of connections
To give you an idea of how Palantir presents data, below is an example of what Palantir co-founder Peter Thiel’s web could look like in the software. Each circle represents a clickable database that would open new webs of connection tied to that person, institution or event.
A lack of oversight?
Fighting crime and terrorism is a noble cause but the main concern is that Palantir is potentially breaching privacy laws. Indeed, Palantir is a private company which works closely with government agencies and the analytics provided by the software often leads to investigations conducted without warrants. The lack of oversight suggests there is no way to know if US citizens’ constitutional rights are always respected.
However, readers must bear in mind that the scope of the post-911 legislation, best represented by the Patriot Act and the National Defense Authorization Act, have already eroded these rights to the point where intelligence services can collect all the data they want, track and indefinitely detain anyone without providing proof – all in the name of national security. In that sense, Palantir is merely another very sophisticated tool in the military-industrial complex’s already well developed arsenal.
Lucrative government contracts
Palantir’s success in the US Intelligence field has led to very lucrative contracts:
- Palantir has more than $1.5 billion in federal government contracts, including:
- A $1.1 billion contract with the DoD, which includes an $800M+ deal to modernize the Army’s Distributed Common Ground system and a $110M contract to “ to support a massive integration of data among the Army’s far-reaching and disparate systems“.
- A $188.5M contract with the Department of Justice.
- A $94.3M contract with Homeland Security, which involves working with ICE.
- A 5-year, $90M contract with the SEC.
- Palantir signed a contract with the U.S. Space Force to develop “Kobayashi Maru”, a software designed to track and monitor objects in space.
- Palantir beat Raytheon to an $80 million deal with the U.S. Navy to develop a logistics management system for its warship and aircraft branch.
Palantir’s scope extends far beyond the military
Palantir’s corporate software is used by many multinational companies across many sectors, including, but not limited to AI & ML, Mergers & Acquisitions, Sales & Revenue, Automotive, Aerospace, Manufacturing, Insurance, Health Care, and Legal Intelligence. Companies such as Airbus, Chrysler, BP and Merck say the software helps them rationalize processes and save money.
More recently, the COVID-19 pandemic is providing new business opportunities:
- It is working with the U.K.’s National Health Service to develop a COVID-19 data trove.
- It is pitching European health agencies to develop data tracking software.
- It is working with US health authorities to develop a COVID-19 tracker.
Explosive growth prospects
You won’t be surprised to learn that Palantir’s client base generates massive revenues:
- 2019 revenues exceeded $700M.
- 2020 revenues are projected to reach $1 billion.
- Palantir is estimated to have $1 billion of cash on hand.
- Palantir has a backlog of multi-year contracts worth more than $2.2 billion.
Like many growth stocks, Palantir is not yet profitable but the data analytics market is booming: The “Global Big Data Analytics Market was valued at US$ 37.34 billion in 2018 and expected to reach US$ 105.08 billion by 2027 at a CAGR of 12.3% throughout the forecast period from 2019 to 2027“.
If Palantir is indeed a best-of-breed company, then the future is bright and profits will come.
Ethics in the tech world: A Market Opportunity?
Working for the US Intelligence community is highly controversial and many firms are reluctant to take the work due to backlash from its own employees. Google abandoned its Project Maven military AI program last year due to employee protests and Microsoft is telling its employees they don’t have to work on military projects if they don’t want to.
So far, Palantir has refused to cave into its employees’ protests and doubled down on its relationship with ICE, publicly defending the program and renewing a $49M deal. Later, Palantir landed an $800M contract with the U.S. Army to deliver a comprehensive combat intelligence hardware and software suite to replace their legacy systems.
Palantir CEO Alex Karp said “Silicon Valley is telling the average American ‘I will not support your defense needs’ while selling products to countries that are adversarial to America. That is a loser position’”. Peter Thiel, Palantir’s co-founder and vocal Trump supported, went even further and labeled Google’s abandonment of Google Maven “treasonous”.
At the 2019 Davos summit, Karp doubled down on his stance, stating that “the core mission of our company always was to make the West, especially America, the strongest in the world, the strongest it’s ever been, for the sake of global peace and prosperity“.
In truth, Palantir is mired in complex geopolitical considerations that are difficult for outsiders to evaluate.
Palantir’s IPO will increase public scrutiny
Ethical considerations and public scrutiny are precisely the reasons why Palantir enjoyed being a private company for so long. Karp once said that being private gives a company the luxury of doing what it wants without having to listen to outside opinions. Going public will place the company under intense scrutiny and public pressures may force the company’s hand when it comes to certain programs.
However, Palantir may choose to ignore morality and ethics. The difference with most Silicon Valley companies is that Palantir is both a technology company and a military contractor. For example, it competes with Raytheon for federal military contracts and with traditional software companies for data-analytics services. As such, it is an interesting hybrid that escapes traditional categorization.
Obstacles to mainstream adoption
Nefarious ideas became trivial to implement; everyone’s a suspect, so we monitored everything. It was a pretty terrible feeling”.JP Morgan cyber security expert, source: bloomberg.com
Beyond ethical concerns, the biggest obstacle to Palantir’s growth is its ability to design cost-effective, custom-built data analytics for businesses outside the intelligence community.
50% of Palantir’s clients are government agencies loyal to its cause but the other 50% are corporations in dire need of sophisticated data-analytics software. This market is very competitive so Palantir will have to listen to their concerns and needs in order to capture their business.
Some corporations, such as Coca-Cola, American Express and Home Depot very publicly canceled their Palantir subscriptions on the basis that the software was very expensive and not very useful. Palantir was criticized for lacking transparency in its pricing policy and failing to deliver the world class custom-built data analytics solution it had promised.
Palantir’s software is very expensive. Indeed, it is custom built for every client, which is a labor intensive endeavor requiring teams of forward deployed engineers working onsite at client offices. Thus, subscriptions cost millions of dollars per year and the company (in the past) had the very bad habit of reevaluating deals to (allegedly) inflate their bookings: While Palantir and Home Depot agreed to a $37.5M deal over five and a half years, Palantir later revealed they planned on billing close to $60M for the service, which ultimately led to Home Deport ending the partnership.
Defense contractors are notorious for developing expensive products, which is generally not an issue when it comes to government money. Public companies, on the other hand, are much more attentive to costs and will not hesitate to terminate contracts if they deem a particular is not worth the money.
Going forward, this is a serious issue that Palentir will have to solve.
Investors love the company
Despite the ethics concerns and uncertainties surrounding corporate adoption, institutional investors are rushing to invest in the company.
In total, Palantir has raised roughly $3.3 billion dollars from no less than 108 different investors, including behemoths BlackRock, Tiger Global Management, Fidelity, Morgan Stanley, and Hercules Capital. In July, Palantir filed a Form D revealing that it was raising nearly $1 billion, including $550M from Japanese companies Sompo Holdings and Fujitsu.
Institutional enthusiasm is a very good sign which suggests their due diligence concludes that growth prospects are favorable.
One of the most valuable private companies in the USA
Recent estimates value Palantir anywhere between $20bn to $26bn, which makes it one of the most valuable private companies in the Silicon Valley.
The controversial tech IPO is very anticipated and could be the biggest since Uber in 2019.
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DISCLAIMER: This article is the fruit of my personal research and should not be considered financial advice. I enjoy analyzing stocks and providing investment ideas but I highly encourage you to conduct your own research before investing in any asset. NEVER invest without having done proper due diligence and NEVER invest out of the Fear Of Missing Out (FOMO). Also, NEVER invest because some internet message boards are hyping up a high-flying stock. As a rule of thumb, the number of rockets included in a tweet are inversely proportional to the quality of the advice given.