We Are Lowering Long-Term Growth Estimates for Palantir; FVE Down to $16

Business Strategy & Outlook

The Palantir is well suited to help organizations consolidate and harness the power of data. With its leading position in the government sector with the U.S. and its allies and a growing presence with commercial data applications, this narrow-moat company is poised for robust growth and margin expansion as deployment costs are optimized and product acceptance hastens with task-specific modules. Uncovering insights and easy integration of data is a largely untapped market, due to legacy data sets saved in different locations, various data formats, the uptick in cloud-based resources, and the proliferation of the need for real-time access via distributed devices. Palantir established itself by working with the U.S. government intelligence and defense sectors to integrate data into a consolidated dashboard and then drove outcomes by uncovering patterns with artificial intelligence support. Its Gotham software platform is used across various government sectors of the U.S. and its allies.

Palantir sells its Foundry software platform to commercial organizations, targeting large-scale data operations. Holistically combining data has typically involved consulting alongside in-house customized development efforts for enterprises, but Palantir’s commercial offering is attempting to change the industry’s procurement motion. Its software is used in a variety of industries; Palantir’s aim is to be the data operating system for companies and industries. By stitching together various seemingly disparate components of the airline industry, as one example, Palantir has made inroads into becoming a data platform standard for the industry and looks to other industries to achieve similar results. The company rotates its engineers into the field to understand customer and industry issues firsthand to make its platforms more valuable while gaining deployment cost efficiencies. A robust growth trajectory comes from new commercial ventures on top of a strongly expanding government base, and that installation efficiencies and the strategic shift toward a software-as-a-service model will be conducive to margin expansion throughout the 2020s.

Financial Strengths

The Palantir is in a solid financial position that is on a positive trajectory. The company has historically operated at a loss while producing negative operating cash flow; however, these results improve throughout the 2020s. The rapid revenue growth alongside an improving margin profile will help generate bottom-line improvement alongside positive free cash flow. The company’s existing customer base generates the bulk of revenue, which gives high visibility and an opportunity to expand customer margins. Although the model Palantir generates positive free cash flow and being profitable on an adjusted basis, after adding back copious amounts of stock-based compensation, the GAAP profitability may not come until the middle to latter half of the 2020s. The expansion into the commercial market, proliferation across government sectors, and further decreasing the expenses required to initially deploy its software platforms will drive Palantir’s operating profile and cash flow improvements. As of the end of June 2021, Palantir had no outstanding debt and $2.3 billion of cash and cash equivalents, excluding restricted cash. The company chose to use a direct listing to join the public markets in 2020, so no cash was raised during the IPO process. Although the company had various funding rounds before going public, the direct listing can be viewed as a testament to Palantir’s solid financial footing and being confident of funding new ventures internally. The strategic initiatives to expand its enterprise software subscription business, alongside sticky government deals, could reward investors over the long run.

Bulls Say

Palantir could be the answer to the problems that governments and commercial customers face in successfully integrating large-scale, disparate data in a cohesive and coherent manner to gain insight and drive actions.

Palantir has a strong government business and is diversifying into potentially higher-margin commercial markets; it could become the data operating system for companies and industries.

The company has substantial margin expansion opportunities via improvements in deployment costs and by offering commercially available solutions to prospects.

Company Description

Palantir Technologies provides organizations with solutions to manage large disparate data sets in an attempt to gain insight and drive operational outcomes. Founded in 2003, Palantir released its Gotham software platform in 2008, which focuses on the government intelligence and defense sectors. Palantir expanded into various commercial markets with its Foundry software platform in 2016 with the intent of becoming the data operating system for companies and industries. The Denver company had 125 customers as of its initial public offering and roughly splits its revenue between commercial and government customers.

(Source: Morningstar)

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