Palantir Technologies - The Data Wizard
Fundamental Analysis and Intrinsic Valuation
Overview
Palantir Technologies is building software that empowers organizations to effectively integrate their data, decisions, and operations at scale. They were founded in 2003 and started building software for the intelligence community in the United States to assist in counterterrorism investigations and operations. later began working with commercial enterprises, who often faced fundamentally similar challenges in working with data. The company has built three principal software platforms, Palantir Gotham (“Gotham”), Palantir Foundry (“Foundry”), and Palantir Apollo (“Apollo”). Gotham and Foundry enable institutions to transform massive amounts of information into an integrated data asset that reflects their operations. For over a decade, Gotham has surfaced insights for global defense agencies, the intelligence community, disaster relief organizations, and beyond. And Foundry is becoming a central operating system not only for individual institutions but also for entire industries. Apollo is a cloud-agnostic, single-control layer that coordinates the ongoing delivery of new features, security updates, and platform configurations, helping to ensure the continuous operation of critical systems and allowing our customers to run their software in virtually any environment.
Software Platforms
Gotham
Gotham enables users to identify patterns hidden deep within datasets, ranging from signals intelligence sources to reports from confidential informants. It also facilitates the hand-off between analysts and operational users, helping operators plan and execute real-world responses to threats that have been identified within the platform. Gotham is now used broadly across government functions. They also offer Gotham to commercial customers, including to those in the financial services industry in connection with fraud investigations.
Foundry
Foundry transforms the ways organizations operate by creating a central operating system for their data. Individual users can integrate and analyze the data they need in one place. The speed with which users can experiment and test new ideas is what makes the software stick. Data projects often fail because the steps and methods used to build data pipelines are difficult to understand and recreate. The platform’s graphical interface does the rest, allowing users to track and trace their pipelines so they know what the rows and columns in their tables represent and why they are there. All of our commercial customers now use it, as do several of our government customers.
Apollo
Apollo was built to enable the continuous delivery of AI software wherever the customers are: in the cloud, on-premises, or even more rugged environments. In 2021, the company began offering Apollo as a commercial solution to allow our customers to securely deploy their software in virtually any environment. Apollo provides a single control layer to coordinate the ongoing delivery of new features, security updates, and platform configurations.
Revenues
Palantir generates revenues from the sale of subscriptions to access their software platforms in a hosted environment along with ongoing Operation & Maintenance (O&M) services (“Palantir Cloud”), software subscriptions in the customers’ environments with ongoing O&M services (“On-Premises Software”), and professional services.
One of the most mandatory signs that we are seeking in non-profitable companies, is the expansion of the Revenues. The below table shows that Palantir has a constant growth in revenues with a total increase between 2018 and the TTM (2023) to be at 233%.
Profitability
The company operates in the sector of Software (Applications and Systems) and as a result, has a very low cost of revenues. Furthermore, high operating expenses from Sales & Marketing, Research & Development, and General & Administration are smoothing off which reflects that Revenues growth is higher than the growth of operating expenses, managers deploy capital with efficiency, and the company may turn profitable soon.
Also, looking at the profitability metrics of Palantir we conclude that Gross margins are stable between 2018 and 2022 but operating margins are negative and highly fluctuate, especially during the COVID-19 crisis which touches the value of -107%.
Operating Expenses
Sales and Marketing
Sales and marketing efforts span all stages of their sales cycle, including personnel involved with sales functions, and executing pilots at new or existing customers. Sales and marketing costs primarily include salaries, stock-based compensation expenses, and benefits for their sales force and personnel involved in sales functions, executing pilots and customer growth activities; as well as third-party cloud hosting services for pilots, marketing and sales event-related costs, travel costs, and allocated overhead.
Research and Development
Research and development efforts are aimed at continuing to develop and refine the platforms, including adding new features and modules, increasing their functionality, and enhancing their usability. Research and development costs primarily include salaries, stock-based compensation expenses, benefits for personnel involved in performing the activities to develop and refine the platforms, internal use of third-party cloud hosting services and other IT-related costs, travel costs, and allocated overhead.
Looking at the expenses individually 79% of them are as a result of Sales/Marketing and Administration, and only 21% stand for Research & Development. Furthermore, this ratio between the costs seems to be stable since 2018 and we can conclude that the priority of the management team is to acquire more customers through marketing and to make the products abroad available.
To close my thoughts on the subject, I examine Palantir relative to the average company in the Software sector. As we can see Palantir invests heavily in Sales & Marketing, almost double in Research and Development and the cost of revenues comes close to the average of the sector.
Palantir Technologies Narrative
My narrative for Palantir Technologies goes as follows:
1. Leading company in AI Software Platform with revenues to multiply 18 times by 2033 (Market share equal to 6%).
2. In profitability, I searched at the third percentile of the Software companies which is equal to 24% and I gave a premium of 6% since is a leader in the sector. Thus, I set the operating margins equal to 30%
3. Reinvestment Rate: Palantir operates in the market since 2003 and has better experience in the promotion and development of AI software. As a result, I set sales to capital above the Median of the Software to touch the value of 1.5.
Valuation of Palantir Technologies
Monte Carlo Simulation and Scenario Analysis
The reasons that I am using the Monte Carlo simulation are the following:
1. Many reports revealed different values for the Total AI Software platform.
2. Palantir market share cannot be predicted, as a point estimation, because there are not enough data to help us.
3. To view where my valuation stands and what is the market view about the company.
Conclusion
A good valuation stands between the numbers and narratives. I tried to make estimations in fundamental factors, looking at the history of the company and then I adjusted them to reflect the high competition and the macroeconomic effects. Furthermore, I ran a Monte Carlo simulation to watch where my valuation stands relative to the market view.
The main advantage of Palantir Technologies is that has an early entry in AI Software Platforms and leads the way in the Global market. Due to the high growth of the sector, it is avoidable the high competition from other companies and that’s why I assumed that the market share will remain at 6% and with a considerable reinvestment rate. On the other hand, in my narrative, I assumed high growth, high margins, and at the same time high competitive advantage for perpetuity and that’s why my valuation has reached the overvalued territory (19$ per share). To conclude, for my taste Palantir is slightly overvalued and I will wait for a lower market price. I hope all of you have good investments and thank you for supporting my work.