Palantir: a potential and controversial rising decacorn

Palantir: a potential and controversial rising decacorn

Quentin Bonnefond

This article written by Quentin Bonnefond (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021) discusses the case of Palantir.

Introduction

Founded in 2003 by entrepreneur Peter Thiel, Palantir provides software and data analysis services to help government agencies (CIA, NSA, etc.) and large corporations (among which Merck, Fiat-Chrysler, Ferrari, Crédit Suisse, Airbus, etc.) process large amounts of information. This discreet activity has led Palantir to be regularly accused of mass surveillance and criticized for its close links with law enforcement agencies.

Palantir introduced in the NSYEBanque Internationale à Luxembourg (BIL)Source : https://finance.yahoo.com/

Still no profits

Palantir is a real cash consumer. In 2019, its operations consumed $165 million in cash, or 22% of its revenues. And its cash consumption increased from the previous year. In 2018, Palantir’s negative cash flow from operations was $39 million, its cash consumption in 2019 soared by 323% while its revenues increased by only 25%.

The company has very high overhead costs, which accounted for 105% of sales last year. This is due to high R&D costs and low selling prices compare to traditional consulting due to the lengths of its project (several years). To be competitive and acquire new clients, the firm needs to propose reasonable prices.

In 2019, for example, Palantir’s sales and marketing expenses of $450 million accounted for 61% of sales, while general and administrative expenses of $321 million accounted for 44%.

After 17 years of existence, Palantir still hasn’t figured out how to make a profit.

The financial and health crisis: an opportunity not to be missed

The coronavirus crisis has created “enormous opportunities”. This phrase has prompted many funds to invest in the company. Moreover, at the end of January 2021, in a morose context of economic and health crisis, the Californian firm announced a partnership with IBM, which skyrocketed the share price to $39, which was 4 times its value at the time of its initial public offering (IPO), 4 months earlier.

Source: https://fr.finance.yahoo.com/quote/PLTR/

A price correction

Uncertainty linked to the global health crisis smiles on Palantir, but the end of the crisis could be (slightly) more unfavorable for the firm. The US company says that revenue growth is expected to slow to about 30% in 2021, compared to 47% in 2020. This announcement is reflected in the share price: $26.75 at the market closing of 23/02, a 31.41% drop in one month.

The company reported better-than-expected sales in the fourth quarter and recorded more than $1.1 billion in annual revenues by winning 21 contracts worth $5 million or more.

Insights:

  • $1.1 billion in revenue for full-year 2020, up 47% year-over-year
  • $322 million in revenue for Q4 2020, up 40% year-over-year
  • New contracts in Q4 2020 include Rio Tinto, PG&E, BP, U.S. Army, U.S. Air Force, FDA, and NHS
  • Expects Q1 2021 revenue growth of 45% year-over-year

A bright future for data and Palantir

In a conference call with analysts, Palantir’s Chief Operating Officer, Shyam Sankar, indicated that the company’s approach to automated data management and software will increase the total addressable market. “Look at our investments in archetypes. This means that in a few clicks you can deploy powerful end-to-end use cases that would have cost millions of dollars and taken many months to develop and can now be deployed in minutes,” he boasted.

“These are examples of why we’re confident in our long-term growth, which is expected to exceed $4 billion by 2025,” he said. Indeed, the company has a lot of leads for acquiring corporate customers. Palantir had eight Fortune 100 clients and twelve Global 100 clients.

The recent launch of the company’s platform, called Foundry 21, is expected to make it more modular with better data integration, code-free applications and a mobile offering. Historically, Palantir has always needed more implementations and high-level consultants. Recently, a demo day has generated more requests from potential customers.

Conclusion

In spite of huge cash consumption preventing Palantir from being profitable, the crisis has had a boost effect on the American firm’s activity. Growth is expected for 2020 and is expected to be, admittedly less, but at least significant for 2021. Excluding the accusations surrounding data protection and privacy, Palantir is promised to make great strides. A stock to watch.

Capital structure

Top 3 shareholders:

  • Thiel Peter (co-founder): 16.60%
  • Sompo Holdings, Inc: 7.30%
  • Alexander C. Karp (co-founder and CEO): 5.50%

Full structure and top 10 funds shareholders: money.cnn.com

Key concepts

Unicorn, decacorn and hectocorn

In business, a unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. Decacorn is a word used for those companies over $10 billion, while hectocorn is used for such a company valued at over $100 billion.

Start-up valuation

Startups, pretty much like babies, need money to expand themselves, test ideas and develop a team. To raise money, a startup needs to be valued and therefore, understanding how the startup valuation process works is very important for any serious and committed entrepreneur.
Various valuation methods are used such as the Venture Capital, the Berkus, the Cost-to-ducat, the DCF or the Comparables methods.

Link: https://pro-business-plans.medium.com/startup-valuation-the-ultimate-guide-to-value-startups-2019-a31cbdaebd51

Initial Public Offering (IPO)

An initial public offering (IPO) or stock market launch is a public offering in which shares of a company are sold to individual and institutional investors. After the IPO, shares are traded freely in the market (secondary market).

Secondary market

The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The existence of a secondary market provides liquidity for investors.

Useful resources

Capital.fr : https://www.capital.fr/entreprises-marches/palantir-le-big-brother-de-lanalyse-de-donnees-debarque-en-fanfare-en-bourse-1381955
https://www.capital.fr/entreprises-marches/palantir-devisse-la-croissance-de-lactivite-va-nettement-ralentir-en-2021-1394242
Forbes.fr: https://www.forbes.fr/finance/entree-en-bourse-de-palantir-pourquoi-il-ne-faut-pas-investir/
Palantir.com: https://www.palantir.com/
fr.finance.yahoo.com: https://fr.finance.yahoo.com/quote/PLTR/
marketwatch.com: https://www.marketwatch.com/investing/stock/pltr

Relevance to the SimTrade Certificate

The case of Palantir is relevant to the SimTrade Certificate as the stocks issued by the company are now traded on the stock market which brings liquidity for investors. It relates to the SimTrade Certificate in the following ways:

About theory

  • By taking the Discover SimTrade course (Period 1), you will discover the SimTrade platform that simulates a secondary market with a limit order book.
  • By taking the Market information course (Period 2), you will know more about how information is incorporated in the stock market price.

Take SimTrade courses

About practice

  • By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
  • By launching the Market order simulation and the Limit order simulation, you will practice market orders and limit orders that are the two main orders used by investors to build and liquidate positions in financial markets.

Take SimTrade courses

More about SimTrade

About the author

Article written by Quentin Bonnefond (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2020-2021).

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