Palantir (NYSE: PLTR), co-founded in 2003 by Peter Thiel of PayPal fame, went public on September 30, 2020, to much fanfare. Following a wildly successful couple of years, the stock has now plummeted to figures close to its initial IPO price. The company, aside from being highly controversial and in business for over 17 years, still remains relatively unprofitable, so let’s examine how Palantir makes money.
What is Palantir?
Palantir is named after the magical crystal ‘seeing stones from J.R.R. Tolkien’s “Lord of the Rings” books, which are used for communication and to see events in any part of the world. The company specializes in deep data analyses; what does that mean? It means, for example, that to get detailed info on someone, all you would need is a name and license plate number and Palantir does the rest. It performs a deep search of all criminal, financial, medical, communication, and clandestine agency records on the target.
The company’s tech helped locate Osama bin Laden in 2011 and is being used to trace COVID-19 infections, track medical supply chains, and even predict outbreaks in pandemic hot zones. Think of the company as a search engine for deep analysis of petabytes (or millions of gigabytes) of data.
Palantir’s Business Model
Palantir is split up into three main products: Gotham, Foundry, and Apollo. Gotham is used by counter-terrorism analysts in the United States Intelligence Community (USIC) and the United States Department of Defense (DOD). Foundry is used by commercial clients like Merck, Airbus, and Fiat Chrysler while Apollo is a system that manages and deploys both Gotham and Foundry from a software standpoint. Palantir’s business model has three phases: Acquire, Expand, and Scale.
In the acquire phase, the company offers initial implementation at little or no cost to the new customer and the customer is considered to remain in this phase if its revenue is less than $100,000 in the respective year. In the next stage, Expand, Palantir continues to further expand the implementation, pinpointing specific pain points and challenges; this phase is entered once revenue from the customer exceeds $100,000. The customer enters the scale phase once everything is implemented and configured and the client adds their own software to sit atop Palantir’s platform.
How does Palantir make money?
Palantir added 27 new customers in Q2 2022, bringing its customer growth for the quarter to 80% versus the year-ago quarter. The company’s U.S. commercial revenue grew a whopping 120% YoY in the quarter. Palantir’s contracts are highly secretive due to the nature of its work, and many of the players are required to sign non-disclosure clauses in their deals, so exactly which deals they landed are not always disclosed.
The same report also showed that Palantir exceeded analysts’ expectations for revenue by making $473 million versus the expected $471.3 million.
What’s next for Palantir?
Palantir continues to improve on its platform; its Titan release of Gotham offers improved performance, more customized views, and AI integration. Upon its inception, the company didn’t really have a sales team as its products were priced at a level where its leaders assumed a CEO would need to pitch. This view has changed recently as Palantir now has a sales team, which has led to more efficient data management and sales output.
Is Palantir a good investment?
Palantir estimates that its total addressable market (TAM) is roughly $119 billion and some analysts project revenue to reach $9 billion by 2026. It seems to be on its way there as the company stands firm behind its projected annual revenue growth of 30% or more through 2025.
However, a mixed earnings report saw investors sell-off to the tune of over 14% following Palantir’s latest earnings call. Shareholders are demanding more profitable growth, with a rotation away from growth stocks hammering tech firms across the market. Palantir is now notably trading at lows not seen since its IPO.
The highly secretive company is controversial as it is an advocate of greater surveillance since it aids in its capabilities; additionally, its software has been used to identify working illegal immigrants to aid in their deportation.
That being said, the company has a unique product that no doubt serves various clandestine agencies and government contracts are often very lucrative. Ultimately, I feel that it’s a good — albeit risky — long-term addition to your portfolio, but only if you don’t mind turning a blind eye to the company’s shady dealings.