Palantir Technologies (NYSE:PLTR) stock is now publicly trading through a direct public offering that had the government contractor and consultancy at valued at $15.7 billion.
Shares opened on Wednesday at $10 a piece and closed 50 cents lower, performing much like the debuts of Spotify (NYSE:SPOT) and Slack (NYSE:WORK), which also went public in this way. PLTR stock was no Snowflake (NYSE:SNOW), which last week debuted at $120 a share and promptly skyrocketed above $300.
The S-1 described a 17-year-old company that continues to lose money serving military and spy agencies. The company has done commercial contracts and is raising money because it wants to do a lot more. It’s also stricter than any previous tech IPO in maintaining control for founders Peter Thiel (52), Alex Karp (52), and Stephen Cohen (37). A special “Class F” stock share guarantees them effective control until the youngest of them dies.
What’s Behind PLTR Stock
But the S-1 describes a slow-moving company with a narrowing moat.
The company’s first platform, Gotham, uses semantic, temporal, geospatial and full-text analysis to create maps and graphs. It was reportedly used to identify the hideout of Osama bin Laden.
Foundry is an artificial intelligence (AI) tool that lets users query huge data sets using natural language. The problem in both cases is that open source AI tools are improving more rapidly than Palantir’s proprietary ones, because there are more hands on the code.
According to the documents, Palantir is growing fast but is not yet profitable. It was able to narrow its net losses this year by reducing head count, specifically among people who install and deploy the software. The company claims an adjusted profit for the first half of the year, $17.2 million, but lost an adjusted $167 million during the first half of 2019.
Gross margins are high at 73%, but so are marketing costs to secure big contracts. During the first half of 2020 it lost an unadjusted $165 million, 27 cents per share, on revenue of $481 million. A year earlier it lost $280 million, 49 cents per share, on revenue of $322 million during the same period. The company had $1.5 billion in cash on the books at the end of June and debt of $297.6 million.
Focus on Ownership
Coverage of the S-1 focused on its ownership structure, which was amended several times before the offering. Even if they own just 0.5% of the shares, the co-founders retain 68% of the voting stock. The company got early funding from the venture arm of the CIA. It is still dependent on the U.S. government, having received a $800 million U.S. Army contract last year.
This is reflected in the S-1, which is brazenly nationalistic. “We have chosen sides,” Karp wrote, promising not to do business with China and to aid “the West.” Despite wanting to become “the default operating system of the U.S. government,” as the S-1 states, 60% of Palantir revenue comes from outside the U.S. It’s Cold War rhetoric, 30 years out of date.
The Bottom Line
The question for investors isn’t whether Palantir’s ownership structure or politics are out of date. It’s whether its proprietary software development is.
The valuation of Palantir has been reduced slowly over several years. It was reportedly valued at $20.4 billion by Pitchbook in 2015 and was trading privately at $9.17 a share at the start of September. It seems that the more it was marketed, the less value it was seen to have.
As an investor, that would concern me far more than the founders’ politics or their ties to the CIA. Palantir is selling an obsolete business and technology model into a fast-changing market. It may be an oracle, but I’d rather own salesforce.com (NYSE:CRM).
At the time of publication, Dana Blankenhorn held no positions in companies mentioned in this story.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.