Founded in 2003, Palantir Technologies (NYSE:PLTR) was once regarded as one of the more mysterious companies around. The company has been connected to 1) the finding of Osama Bin Laden 2) the conviction of Bernie Madoff 3) and aiding the Immigration and Customs Enforcements (“ICE”) raids. Since going public in late 2020, PLTR stock has generated a lot of investor attention, and for good reason.
Investors should consider giving Palantir stock a place in their portfolios. But, before we dive deeper into the stock, here’s a quick look at what the company does.
Palantir in a Nutshell
Palantir is a software company that, “enables … customers to transform massive amounts of information into knowledge that reflects their world.” As an example, healthcare organizations use the software to make decisions on how best to allocate personal protective equipment (PPE) supplies across different hospitals all over the country who all have vastly different levels of needs for each PPE item.
An even better example is that the platform is used to, “identify patterns hidden deep within datasets” to help the U.S. Military find what it is looking for (i.e., Osama Bin Laden).
The company has two separate software platforms. Palantir created one of its platforms for the governmental operatives (FBI, CIA, etc.). It created the other for commercial enterprises. The individual responsible for coming up with the governmental operative’s platform deserves a prize as the name, “Gotham,” fits the platform’s purpose perfectly. The commercial platform goes by the name, “Foundry” (not nearly as cool).
Palantir’s Issue with Silicon Valley
Like most software companies, Palantir was born in Silicon Valley (now headquartered in Denver), yet it regards itself as the anti-typical Silicon Valley company. In a quote from the company’s public filing paperwork, CEO Alex Karp stated, “the engineering elite of Silicon Valley may know more than most about building software. But they do not know more about how society should be organized or what justice requires.” That sounds like a man in tune with reality if you ask me.
Speaking of reality: security, data protection and individual privacy have been some of the hottest topics of late. That’s even more true following the release of the Social Dilemma on Netflix. Companies like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN) and Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google all collect your data. Facebook has even been exposed for sharing user data.
It’s possible that Palantir could have just as much access to our data than any one of those companies. Yet the company prides itself on keeping that data private and used solely for decision making (i.e., deporting an illegal immigrant or taking out a terrorist).
PLTR Stock: Earnings, Revenue and Customer Base
One similarity that PLTR has with the other software companies is that it has struggled to turn a profit. Over the last three years the company has reported a GAAP earnings per share (EPS) of -$1.11 in 2018, -$1.02 in 2019 and -$1.19 in 2020.
However, annual revenue growth has now accelerated 3 years in a row with 2020 revenue growing 47% year over year. This was Palantir’s largest annual revenue growth since 2015. The company guided 45% YOY revenue growth in Q1 2021. Furthermore, it stated that annual growth should exceed 30% each year over the next 5 years.
The most intriguing note I took from my research is that the company actually estimates that between the commercial and government sector, that its total addressable market (“TAM”) is approximately $119 billion. A company’s TAM is the estimated amount of revenue that a business could possibly generate for a particular product the business offers. Considering PLTR’s 2020 total revenue was just over $1 billion (less than 1% of the estimated TAM), it appears that management has extremely high hopes for the future.
The company also has a very high retention rate with its top 20 customers having been with Palantir for an average of 6.6 years. In the second half of 2020, Palantir brought on 14 new customers and signed several multi-year deals in Q4 with companies such as Rio Tinto (OTCMKTS:RTNTF) and Pacific Gas and Electric (NYSE:PCG). Palantir also continues to build on U.S. Army partnership which should be a big source of revenue growth into the future.
The U.S. Army Connection
Speaking of which, the story behind the company’s contract with the U.S. Army is a fascinating one — it’s also important for getting the full picture behind PLTR stock.
In 2016, the company sued the U.S. Army (so wild a company would sue the Army) over the government looking to build their own software instead of going with the private sector innovation. Palantir won the case in 2018, and in 2019 beat out Raytheon (NYSE:RTX) in a bid to win a 10 year contract with the U.S. Army. As a result, the company has generated $179.90 million in revenue since September 2018 from the U.S. Army vs only $51.9 million from 2008 to September 2018.
One Key Issue: Customer Concentration
Palantir’s U.S. Army contract is solid and the prospects for strong customer growth in 2021 are strong. However, customer concentration is a pretty glaring issue for Palantir right now.
In 2019, the top 20 customers accounted for 67% of total revenue and in 2020 the top 20 customers accounted for 61% of total revenue. That’s an improvement YOY, but it still presents a significant risk. If the company were to lose any of those customers, revenue could take a dramatic hit.
Final Thoughts on Palantir
Palantir is a unique software company. It has the widest array of clients around and high expectations for future revenue growth. The company has struggled to turn a profit, It has high customer concentration risk. And it’s up 240% from its IPO price. Oh, it also still trades at a richly valued 41x price-to-sales ratio.
Ultimately, PLTR stock may have some volatility and turbulence in the future. But this stock should be a winner in the long run.
As of this writing, Thomas Logue, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
