What's up with Palantir?

If you've been following trendy tech stocks recently, Palantir has been rather popular recently. Having only directly listed in September, their share price has risen from around $10 to $26 today. With a purported total addressable market of $119B according to Palantir's S-1 filing and having raised $2.6B, many people seem to believe that Palantir has the potential to be the next breakout tech stock.

Big numbers aside, what exactly does Palantir do?

Word of Caution

Anything not cited in this article or linked to another source is my opinion, so please do your own due diligence. If you're not interested in looking through company fundamentals, please think twice before putting your hard earned money in a company.

As for myself, I do own shares in Palantir . This article is based off my personal due diligence notes that aided in my decision-making process, edited to add some additional details.

If you're interested in asking specific questions or anything related to this article, please don't hesitate to reach out to me_ _here! I'll reply within a day.

Palantir's Product

Palantir has 2 main products: Foundry and Gotham.

Foundry: This is mainly positioned for commercial customers. On their website, it's stated that Foundry prides itself on "versioning semantics to keep data and logic in sync" and has a "microservice architecture with built-in coordination". Data jargon aside, Foundry basically acts as a centralised operating system for client data. Foundry is created with the intention of being scalable and integrable with other systems used by clients.

Gotham: Gotham was actually what Palantir started out with, but it was known as Palantir Government! A little bit less "relatable", Gotham's main capabilities include: "search and discovery capabilities, knowledge management, and secure collaboration".

Palantir's Business Model

Palantir opts for a full-stack approach to data analytics and management, which means that they address customer needs end-to-end. This is clearly reflected in their 3-phase business model, which includes: Acquire, Expand and Scale.

Acquire: Similar to how Grab penetrated the ride-sharing market with attractive promotions, Palantir offers various solutions at zero or little cost to potential clients.

Expand: Clients that belong to the expand phase spend more than $100K a year with Palantir, and are hence a significant contributor to Palantir's revenue.

Scale: Palantir's full-stack solution makes it a mainstay in their client's software stack and it easily integrated with other existing applications. This phase is particularly important since 95% of Palantir's revenue comes from existing customers - making remarketing and expansion of their clientele a necessity.

Source: Palantir's Q3 Earnings Presentation

Risks

61% of Palantir's total revenue is attributed to their top 20 clients, making them a software company with one of the highest client concentrations. For context, they have 125 clients. This overreliance on a core set of customers exposes them to the risk of bearing the downtimes of their clients. For instance, if a key customer decides not to renew their contract or downsizes, then this would clearly have a disproportionate effect on Palantir's bottom line.

For more context, the average Palantir customer pays $5.6M a year. To achieve this, the company plays the long game. First, in the Acquire phase, Palantir often suffers a loss as they go through a software pilot that lasts from 6 months to a year or more. In this phase of the business model, the average customer only spends less than $100K, which is really low for all that work. However, growing a client from $100K to $5.6M is where the expansion phase comes in, and also explains why the CEO of Palantir spends 250 days of the year closing deals.

Palantir's core customers include commercial and government entities, which is what brings them massive contracts. However, this in itself is a risk since their earnings can heavily depend on a few key contracts, which is relatively more high-stakes as compared to companies with a diverse suit of clients. The sales period to acquire each large client would be long and costly.

Competition

Source: Analytic Bridge

With their current suite of services, it wouldn't be a stretch to call Palantir a software and consultancy firm. However, having two fronts also puts them in a position where they have to compete with incumbents. On the software side, they have large companies that focus on analytics like Tableau, Alteryx and more. On the consultancy and services end, they have to deal with conglomerates with data science arms, like BCG Gamma, Digital McKinsey, IBM and Accenture.

Hence, having two "sides" to Palantir is a double-edged sword - while they can try to adopt the pros of both sides, they also have to manage the risks.

Crystal Ball into Palantir's Future

Currently, Palantir's core customers are largely governmental bodies. Hence, wide-scale commerical adoption can be the next step for Palantir. With Palantir's current full-stack approach, they have the solutions required to address the needs of a large segment of the commerical market. To be able to achieve this though, it would be prudent to keep an eye on the efficiency of their sales cycle and demystify their product to commercial buyers.

Moreover, I personally believe that Palantir is a company that thrives in chaos. In times of instability, Palantir profits off disarray. For instance, during this COVID-19 pandemic, Palantir has had one of its better runs. If you'd like to understand a bit more, this article might be more helpful!

Sooooo.... buy now or ???

If you scrolled down here without doing any prior research of your own or reading the rest of the article.. don't buy...

But, if you're seriously considering buying Palantir shares, I would say that the outcome for Palantir seems binary. The risks involved are the "make-or-break" type risks, since Palantir seems overdependent on a few major contracts, with a significant number of them being tied to government entities.

Moreover, Palantir's lock-up period ends on 31 December this year, which is in 10 days. According to Seeking Alpha's John Rhoades, there will likely be a dip right after the lockup period ends. If I were to invest in Palantir again, I wouldn't buy now and buy after the dip, if I'm a long-term investor.