Palantir: The Next Tesla, or a Financial Black Hole?
Admittedly, the timing isn’t ideal when comparing a Palantir to a company whose Commander-in-Chief (or Technoking as his official job title states) is pumping out Crypto tips not even the Salvation Army would take in.
But despite Elon’s quasi-Twitter-God-like status wearing thin with even his most faithful acolytes, let’s not forget that Tesla’s share price is still up over 1,300% from 2 years ago.
And over the last two years, one constant which has remained for Tesla is the non-stop drubbing from value-driven naysayers. Of which I include myself.
Common critiques include their eye-watering valuation, their ability to haemorrhage cash and the comparatively diminutive number of cars which actually leave the lot. Throughout all of that though, there’s been one belief which has remained unaverred which is the belief in their future potential.
Credit where it’s due, they made electric cars cool. At a time when emission regulations are becoming stricter by the day, it’s easy to see why investors were prepared to pay a pretty penny for Tesla’s multi-year lead on the EV market.
“But this faction of founders are such prolific career investors, they could pitch me premium sand on a beach and I’d walk away with my pockets stuffed with finely divided granular rock and mineral to build my new city centre sand condo.”
When netting off the pros and cons, ultimately investors will vote with their cash, and it’s clear that a fundamentally great product will outshine in the stock market.
Now I appreciate you haven’t come here to read about Tesla, if you want to do that, you can find my previous Tesla story here.
However, there’s a very similar feeling when assessing the merits of Palantir.
For several months now, there’s been an excitable hubbub surrounding Palantir’s future potential with market pundits citing its huge lead on big data analytics and how they’re using this lead to change the way governments operate national security.
According to various media reports, Palantir’s data mining played a key role in finding the hideout of Osama Bin Laden. And from terrorism to fraud, they were integral to exposing Bernie Madoff’s $65bn Ponzi scheme.
This certainly isn’t an overnight flash in the pan innovation either, but rather an 18-year mission to create the very best in data analytics which is split into three main platforms, Gotham, Foundry and Apollo.
I’m sure by now, we’ve all seen a Netflix crime documentary whereby the serial killer evades capture by slipping through the paperwork travelling state to state. Well, those days may be over. Through their Gotham platform, Palantir were able to integrate all CIA and FBI databases which were previously siloed. So important is their work, it comes as no surprise that Palantir were part funded by the CIA in the early years.
Sorry Netflix, you might have to find another gun-toting proudly gay zoo keeper for the time being.
Government contracts make up 56% of their revenue and one recent contract (valued at $32.5m) awarded from the US Air Force didn’t even go up for tender but instead went straight to Palantir. There was simply nobody else capable of doing what they do and given the above-mentioned long-standing history, you can start to understand just how integral they are to US Government operations.
But like with any ground-breaking technology comes great expenditure.
Cash Burn & Valuation
It’s a lot, and it’s high….
And it’s to be expected. Given they’re striving for perfection which is very much reflected in their top line revenue growth.
However, their cash burn shouldn’t be ignored and the following numbers could well scare off the more cautious investor.
Operating losses from 2019 to year end 2020 more than doubled, going from -$576m to -$1.17bn. Similarly, EPS losses also doubled down in the same period going from -$0.348 to -$0.654.
But there’s hopefully better prospects on the horizon with Palantir forecasting positive EPS (normalised) of $0.143 for 2021 and $0.206 for 2022. Based on their 2021 forecast, this values the company on a multiple of 143X EPS.
Very ‘dear’ as my granny would have said…
As daunting as those figures may sound, we need to remind ourselves of exactly the market we’re in. A market whereby the Federal Reserve is printing $80bn every month and interest rates remain at historical lows.
And where money is so plentiful and cheap, we’re witnessing SPACs (Special Purpose Acquisition Company) awarded multi-billion-dollar valuations. If you’re not au fait with the new and exciting SPAC trend, they’re effectively a jumped-up pitch deck. A platform to simply raise cash for an idea. Some SPACs will come good on their vision, but many crash and burn.
And if market speculators are happy to bid up a flash in the pan marijuana powered windmill renewable energy SPAC with no earnings or even revenue, then a forward earnings multiple of 146X doesn’t seem so ridiculous. Especially given their most recent quarter on quarter revenues grew by 49%.
It’s probably worth remembering at this time that Tesla, which by many has been considered a black hole of cash reserves, is yet to produce a positive full year earnings report. But it goes to show, if the idea is big enough and looks to have real substance, then this doesn’t need to stand in the way of a market beating share price performance.
When weighing up the quality of a stock, I always like to ask myself how high the barrier to entry is. And with Palantir, it’s higher than a Donald Trump erected border wall.
To give you an insight into their impressive work, Airbus have now commissioned Palantir to integrate 140+ airlines bringing together their combined 9,500+ aircrafts.
The aviation industry is notoriously complex from an operational perspective but by integrating multiple airline data, Airbus can now create a harmonious ecosystem which will reduce flight delays, anticipate aircraft defects, increase efficiency and more. It’s essential technology which once embedded, makes the previous siloed network seem prehistoric.
The commercial upside for Palantir feels like it’s barely scratching the surface when compared to their US government contracts. They’re also being used by BP to boost drilling efficiency and the NHS in their fight against Covid, providing accurate real time data.
Rio Tinto, BMW and 3M have also decided to harness Palantir’s big data solutions.
What’s surprising, Palantir don’t even have a sales department. These contracts only come from inbound enquiries.
Well, that might not be strictly true.
Because it’s probably about time you meet the founders…
Alex Karp, Founder & Public face of Palantir
I don’t normally afford a great deal of time delving into the founding partners of listed tech companies as I’m usually met with a group of faceless venture capitalist sorts. Sure, they’ll have gone to Stanford or Yale and will have amassed wealth beyond most peoples’ dreams but that’s the least you expect.
But this faction of founders are such prolific career investors, they could pitch me premium sand on a beach and I’d walk away with my pockets stuffed with finely divided granular rock and mineral to build my new city centre sand condo.
Peter Thiel who co-founded PLTR in 2003 and was the first outside investor in Facebook (or ‘The Facebook’ as it would have been known when he took part). But Peter is also known by a different moniker; ‘The Don’. That being the Don of the PayPal Mafia which in itself is an extraordinary group of individuals. With 22 members, the Paypal Mafia comprises of the original founders, investors and employees of PayPal. All of which have gone on to become standout creators and developers of companies such as Tesla, YouTube, LinkedIn and Yelp.
Other members of the PayPal Mafia also include fellow PLTR founder, Joe Lonsdale. Who again, comes armed with an astonishing track history of success. He himself founded 8VC, a technology investment firm with over $2bn under management. He was also the youngest member of Forbes’ Midas list in 2016 and 2017.
There are other founders such as Alex Karp who acts as the public face of the company and again has a tremendous track record of early start-up investing. I’m sure buy by now, I’m sure you get the idea. If these chaps pick up the phone, multi-million-dollar contracts are accosted and won.
Big data analytics isn’t a new concept by end stretch of the Silicon Valley but Palantir are proving, quarter after quarter, that they’re by far the preferred bidder in town.
When compared to the likes of SAP and Booz Allen Hamilton, Palantir is clearly catching the eye of investors and it’s easy to see why.
Comparatively, SAP and Booz Allen Hamilton trade at a meagre 23X and 20.7X forward EPS. But with that, their 5-year CAGR (compound annual growth rate) sits at an equally diminutive 5.63% and 7.7%. Palantir on the other hand, 35%. Simply a different league.
In Conclusion
The technology is clearly excellent and in the theme of all things UEFA Euro’s related, I’d struggle to pick a better dream team of founders.
It comes at a high valuation, but relatively speaking I think it’s a fair valuation with incredible future upside.
Or as Warren Buffett puts it best, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
This article shouldn’t be taken as investment advice, however if you decide to buy shares in said company then the fate of your cash lies with an extraordinary group of proven winners.
P.S.
Having just got off the phone to ‘The Don’, I’m now taking deposits on my new complex of rare earth sand mineral apartments in Silicon Valley. To secure your place, click here.
If you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call +44 (0)208 159 8985
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.