Palantir aims to take the whole AI market.

Last week I saw this firsthand.

Based on the success of the previous editions, Palantir hosted the fourth AIPCon, which I had the pleasure to attend.

Let me navigate you through my experience at the Woodstock of AI!

Grab your Palancino.

A special thanks to Chad Wahlquist, ElianoYounes, and the entire Palantir team for making this possible!

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The concert

We were at a corporate event, but the vibe was that of a concert.

The room was packed and the excitement was real.

Music on.

CEO Karp introduced the event underscoring how Large Language Models (“LLMs”) like ChatGPT are not enough to deliver value.

Without an ontology, AI models provide only “self-pleasuring and no fun.”

To deliver value you need to go beyond chatting.

“In the end you have products, your business, chips and ontology. This is how you get things to work.” - Palantir CEO Alex Karp

Palantir AIP is definitely not a LLM.

It’s a platform that helps customers solve use cases across any industry by governing the power of LLMs, while relying on the ontology as the “source of truth.”

LLMs are like genies of the lamp. AIP is the lamp that controls them.

Palantir AIP ensures genies perform their task accurately and safely.

Check my introductory article for more details:

The lights then turn on the real stars of the event: the clients.

The hit-song

8 keynote speakers from different industries explained how they are using Palantir to leverage their operations to solve real use cases with AI:

• AARP;

• SOMPO Japan;

• NorthWind;

• Tampa General Hospital;

• Jacobs;

• Fujitsu;

• Parexel;

• United Airlines.

(Full live stream here)

I appreciated all the demos, but one in particular caught my attention.

Jacobs' EVP Shannon Miller presented how Palantir efficiently helps front-line engineers assess the health of water plans through Mixed Reality (“MR”) glasses.

Palantir AIP provides workers with visual AI recommendations and warnings by looking through the screen:

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This is not a video game. It’s real software deployed into real operations.

Jacobs, which operates global critical infrastructure, represents one of the best Palantir customer journeys. The proof is their continued willingness to present their results with Palantir through the years:

The partnership makes both companies stronger as they continue their shared journey and build trust.

Another customer that already attended was Tampa General Hospital, which presented at FoundryCon on February 23 and announced a $50mn 7-year deal with Palantir just the day before AIPCon.

Deals speak louder than words!

After the keynote presentations, the live stream closed and we went to Palantir’s headquarters for the next phases of the event.

Meet the Masters

This section provided the chance to engage in informal discussions with a range of customer leaders in rapid-fire sessions of 10 minutes.

I joined the SwissRE one, hosted by Development Strategist Robbin Tops.

SwissRE has been working with Palantir since 2018 and is a key European client. According to a presentation shared in 2022, ~40% of SwissRE employees use Palantir Foundry.

I couldn’t lose the opportunity to learn more.

Robbin Tops explained that SwissRE uses AIP to leverage multi-modal workflows for three use cases. The main one is combining forensic police data with other data to assess the validity and severity of the claims.

In simple terms, the job of a reinsurance company like SwissRE is to understand the probability and impact of certain risks so that it can price accurately premiums to clients and diversify better. AIP helps SwissRE use LLMs to analyze unstructured data like videos and images to evaluate risks effectively.

Between the lines of the conversation, I spotted the key to Palantir’s success:

“You have experts that confirm the validity of the recommendations. With AIP you collect the feedback that helps the AI model improve.”

The ontology learns from the feedback of the users, facilitating the efficacy of further recommendations.

I promptly asked whether other companies provided similar solutions:

“I haven’t seen another application that can do that. Foundry is the only application that integrates all the processes and closes the loop.”

This is when I fully realized why Palantir is set to win in the AI space.

You can improve LLMs by giving them more data. However, there is an invaluable source of data that LLMs alone can’t capture: expert feedback.

To have increasingly more accurate recommendations from AI, you need to train it with the decisions and feedback coming from domain experts –that’s the most valuable source of information. Only an ontology allows you to “capture” that data so that it remains in your organization to empower following decisions.

The ontology allows knowledge to be compounded.

Only Palantir has been able to deploy this concept of ontology into complex organizations and its implications are stunning:

“It took me 2-3 weeks to understand to identify the problem I wanted to solve with the multi modal approach in AIP. Building the prototype was a matter of days.”

Not weeks or months. Days!

Without an ontology it would be impossible to:

• capture feedback into the knowledge of your company (close the loop);

• build new operational applications in days;

• measure the real effectiveness of developed applications.

As the presentation ended a representative of an insurance company, a potential customer for SwissRE, approached Robbin Tops to learn more.

The network effects I described two years ago are real.

The AI hunt

The ~70 customers presenting at AIPCon were not paid, CEO Alex Karp said.

Why should they attend?

The audience was composed of a good mix of existing customers and prospective ones. I guess that ~40% were clients and ~60% prospective clients.

For existing Palantir clients, participating in AIPCon means:

• advertise their AI efforts to their board and stakeholders. Executives need to show evidence of their “AI strategy”.

• consolidate their relationship with Palantir. Palantir is proving its software work in the most adverse situations. Being close to Palantir becomes a way to link to its success.

For prospective clients, AIPCon allows:

• build the relationship with Palantir at the cost of a day. Little to lose, and much to gain.

• discover how Palantir could solve its critical problems by listening directly to customers who solved them.

• assess a potential career opportunity. A successful implementation of Palantir associated with significant business output could provide a chance to rise within corporate rankings.

Participating there were also Palantir Partners like Taylor Gregoire-Wright, who previously worked at Palantir for 5 years and is now helping organizations become self-sufficient with Foundry & AIP with company Ontology. Partners like Ontologize are critical to helping Palantir scale.

I noticed a critical commonality among all participants: the desire to hunt.

A potential customer, Software Engineer Manager Christopher Knight, told me:

“I knew Palantir as a retail investor and being in data science. I am seeking an outcome-based use case to convince my organization to deploy to get a production use case in 3 months. Typically you don’t get it. Hopefully one day I will present too.”

Palantir AIP has already solved uncountable use cases across virtually all industries.

Therefore attendees of AIPCon are seeking:

• Evidence that AIP can solve one of their problems by listening to direct experience from someone who solved them;

• Inspiration from problems solved in different industries which could be adapted. In the same way, Palantir learns from transferring defense use cases to commercial ones and vice-versa, customers learn valuable intuitions on how to solve a problem by listening to the experiences of Palantir partners in other industries.

It’s hard to define the “standard attendee:”

• I recognized a healthy mix between Fortune 500 and small companies. So far Palantir has been focused on the leading companies of each vertical, but it seems its focus is widening;

• There was no dominant sector, but I was pleased to see many healthcare and heavy industries companies. Palantir shines amidst regulatory and complex operating constraints;

• The audience included both C-levels and young executives.

AI for all tastes: Demo Expo

Customers showcased applications they built with Foundry & AIP across various industries and use cases.

AIP seems able to solve limitless use cases.

We are not talking about seeing a data dashboard. We are talking about the software used by front-line workers to deploy their daily work, in a fraction of the time, more effectively.

Dashboards allow users to see information. AIP makes users execute.

For instance, Trios Health uses AIP to schedule therapies efficiently:

By attending Palantir’s demo, I realized a “secret.”

Palantir uses AIP internally to improve its operations. Probably even Palantir is not using AIP at its full potential and by interacting with customers it can learn how to leverage it into use cases it didn’t think before.

For instance, Clare Kessi and Julia Richards showed how Palantir uses AIP internally to facilitate the screening of candidates’ applications by “digesting” the unstructured information from thousands of CVs and seeking relevant characteristics like “University” or “Past experiences.”

AIPCon is also an occasion for Palantir to showcase its beta products and receive feedback. For instance, Palantir is now releasing the AIP evaluator, which helps customers assess how different LLMs perform different tasks to choose which one or ones to deploy for each use case.

Within AIP, you can select the AI model you want at the cost of a click. With AIP Evaluator you can maximise LLM performance while reducing related costs.

Are AI models doomed to become a commodity?

Build the “Netflix engine” in minutes

The following phase of the event was called Bring Your Own Data (BYOD). This was a time dedicated to allowing customers to build a use case by leveraging AIP Now with their own data.

As I didn’t have “my data,” I attended the Advanced Bootcamp session with Jack Dobson, Commercial Lead.

In a few minutes and a few prompts, we were able to create a recommendation engine for books.

Stunning.

This is a notional example that can be the archetype for real complicated use cases for instance ticketing, customer care, supply chain, and promotion workflows.

While this could sound scary for data scientists, a system like AIP empowers them. They could focus on solving problems by building on the ontology rather than spending time trying to build tools that hopefully deliver results.

A demo like this would not be possible if the product was not exceptionally strong. This wasn’t a presentation, it was an application built on the go.

The new tool, AIP Evaluation, received particular interest from the participants.

“I’ve been working for a year on this!” the person next to me exclaimed.

All the people at the table were prospective customers who attended at least one BootCamp. They were seeking evidence Palantir can deliver and that is a trustful partner.

Will this experience convert them into clients?

Why does AIPCon succeed?

David Markey, Business Development at Palantir told me:

Palantir is not a tool, but a methodology to solve problems.

The methodology Palantir deploys is grounded on the belief that the closer you are to the problems the more you understand them. This way you can act backwards to solve them.

The environment Palantir can create at AIPCon facilitates a crucial exchange of feedback and ideas. People are open to discussing their issues, creating the condition for a potential solution.

Elias Müller-Möhl, Palantir Forward Deployed Engineer, explained to me that at these events:

“You learn what is possibile.”

AI is new and some software vendors are already exaggerating what their offering can achieve, essentially selling dreams.

In contrast, Palantir is so confident that by organizing an event like AIPCon it can show its software can solve use cases in a fraction of the time compared with other software vendors or software integrators.

Palantir is making the big bet that once customers become aware of what is possible, they will eventually turn to Palantir once they compare it with other possible solutions or, even better, after competitors fail to deliver their promises.

Palantir rocks

When you combine the most powerful AI toolkit with a curated selection of customers, the cocktail is explosive.

The general feeling is that if I were a potential customer I would love to at least try deploying AIP into a use case.

Proof sells better than any sales pitch.

AI may be the hot word of the moment, but the sentiment is real, and real results speak louder than words.

AIPCon: What’s next

Given the success of the event, I believe:

• Palantir will continue to expand and improve the AIPCon and Bootcamp formats. My experience gave me a sense of a clear market fit between what customers search and what Palantir provides. These events are a great way for customers to become aware of a possible solution without passing through the usual PowerPoint slides and multiple steak dinners. A direct experience from an industry leader is worth more than 10,000 slides;

• Palantir will gradually enlarge its focus on small-medium enterprises while showcasing industry leaders so that it can become the standard for related verticals;

• Mixed Reality will become an increasingly important aspect of AIPCon presentations, especially for heavy engineering companies like Honda Heavy Industries, Airbus, and BP. I tried again the MR headset and a giant TITAN appeared in front of me. I could check the health of each single component, which made me realize how critical it is to have an ontology. Without it, it would be impossible to rely on the information I saw and therefore draw any decision.

The aftermath

The day went by extremely fast. I tried to live the experience as a potential customer rather than as a "Palantir creator” to have a clearer opinion.

This was the first event Palantir opened to a retail investor like me and Amit Kukreja, who brilliantly hosted the backstage interview with Palantir employees Chad Wahlquist, Jack Dobson, and Natalie Schneider during the break.

It seems Palantir is acknowledging that there is true value in the community to help spread the great achievements the company is achieving.

I am excited to share this journey.

My firsthand experience with AIP made me realize that if one day I build a firm, I would not think twice about building it on top of Palantir. The power of AIP is unbelievable despite the fact that product is only 1 year old. I see a future where entire new multibillion-dollar companies could be built on top of it.

Palantir suffered from a bad reputation for a long time under the “controversial spy black-box consulting company” label.

AIPCon showed me that not only is the label profoundly wrong, but also that the music has changed.

We are only at the first song of the album.

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Conclusion: let’s rock

Will AIP will bring Palantir to “take the whole market”?

CEO Alex Karp is confident:

Attending AIPCon made me an even more confident supporter and proud shareholder after 4 years of maniacal study of the company.

I could appreciate Palantir’s deep technical capability, what is possible to do with AI, and what makes it possible: an extremely talented group of amazing people led by a rockstar CEO.

Let’s rock.

Yours,
Arny

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Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy, any securities or investment products.

Palantir’s dilution has been a major worry for investors since the DPO.

However, the company successfully reduced the impact of Stock-Based Compensation and its relative impact on Revenues.

We can now say that Palantir’s Stock-Based Compensation is “under control.”

Is it also aligned with shareholders?

In the latest Q1 10-Q, Palantir introduced a tiny, crucial detail that creates a massive shift in the compensation policy:

Palantir granted ~44mn Stock Appreciation Rights (SARs) to employees.

How does this work?

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$50 Target: Aligning Interests

SARs are a way to incentivize employees by giving them the right to receive (in cash) the difference between the stock price and the target if certain conditions are met.

The goal is to align employees with shareholders.

Details of the granted SARs:

• $50 target;

• 5 years of continued service;

• $20 max appreciation per SAR.

In simple terms, employees will be entitled, at the end of 5 consecutive years at the company, to receive the difference between the stock price and $50, but with a cap of $20 per SAR.

For instance, if in 2029 the stock will be:

• $30 = SARs will be worth 0.

• $50 = SARs will be worth 0.

• $60 = each employee receives $10 per SAR.

• $70 = each employee receives $20 per SAR.

• $100 = each employee receives $20 per SAR.

For the stock to be more valuable, the business needs to be more valuable.

This way SARs are a way to incentivize employees by aligning them to the performance of the business and, consequently, the stock.

Differently from options execution, SARs do not involve:

• issuance of new shares

• cash-out from employees.

The company pays in cash employees using its cash reserves.

Differently from RSUs, which vest over time, if an employee leaves before 5 years his/her SARs will be voided.

SARs create an incentive to perform and retain talent.

Assuming that all employees received some SARs:

If the stock exceeds $70 in 2029 each employee will receive an avg. of ~$240k.

The total cash out for Palantir would be $880mn, which would be already easily payable given the ~$4bn Net Cash position.

SARs add to the regular shares employees vest during their time at the company in the form of Restricted Stock Units (RSU).

This is a massive shift in Stock-Based Compensation.

Currently:

• 74mn RSUs outstanding = future shares to be awarded

• 44mn SARs (all granted in Q1)

So we can have the intuition:

~1/3 of the SBC is now pegged to the success of AIP.

Seeking growth

No performance, no reward. What performance?

To reach $50 by 2029 from the current ~$20 per share, the stock needs to increase by 20% CAGR.

This would be ~2x the average return of the S&P500. However, at the $50 price, SARs became actionable but still not valuable.

To reach the maximum payout at $70 per share, the stock needs to increase by ~28% CAGR.

This brings us to a crucial question. How can the stock increase by 28% CAGR?

Assuming that the EV/Sales remains constant at 15x and a fixed ~4% dilution per year, Revenue needs to increase by 32% CAGR (28+4).

In other words, to receive the full benefit from SARs, employees need to deliver growth above 30%, considerably more than the 21% as of last quarter.

As a shareholder, I am excited to see the introduction of SARs to align interests while stimulating talent retention.

Will Palantir employees succeed in achieving the $50 target?

If this article helped you better understand Palantir’s Stock-Based Compensation please hit the ❤️ button and consider supporting my research with a paid subscription.

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Arny

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Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy, any securities or investment products.

is up ~50% in a few days after spectacular Q4 results driven by AI demand.

Some already see an "AI Bubble."

Can the recent hype become an opportunity for Palantir to deliver real growth?

👋 Hi, I’m Arny. Please hit the ❤️ button if you enjoy today’s article.

1. Palantir is now ready to tackle the market

Differently from the 2021 period, when Palantir became famous in the financial world due to the "MEME" status, Palantir now has the toolkits to exploit the recent spike in visibility after spectacular Q4 results.

The US Commercial segment is growing at ~70% YoY backed by "unprecedented demand" for its AI offering.

With Bootcamps, a very quick and efficient Go-To-Market strategy (5 days vs 5 months pilot), Palantir can now properly serve customers efficiently to capture the demand.

To understand this, we can think of an example:

Having high visibility without a solid product to back it up is like having a spotlight without a stage.

It may draw attention, but without something substantial to showcase, the audience will quickly disperse, leaving the potential for success untapped.

This is what happened a few years ago as Palantir was not ready yet to tackle the market at scale. Things are now different.

With Bootcamps, Palantir can transform views into $$$.

As Seneca said, "Luck is when preparation meets opportunity." Palantir has been preparing for 20 years to meet this once-in-a-lifetime opportunity by building a full stack operating system for the modern enterprise.

Now it can capitalize on the most disrupting trend of the decade.

2. AI growth becomes a self-fulfilling prophecy

Major consultancy firms like McKinsey and BCG, dropped their AI reports urging their clients to invest in AI, explaining how they can't be left behind into one of the most secular trends.

All major VCs and Financial institutions agree on the immense potential of the AI market, which is considered to be a paradigm shift like the Internet.

This creates a powerful reinforcing feedback loop:

The more the business world sees a huge opportunity in AI, the more it invests in it.

This, in turn, increases the size of the market and stimulates further innovation.

At the World Economic Forum 2024, Davos, almost all conversations gravitated around AI. This is similar to the ESG trend. When the trend became established each company needed to show its "ESG strategy," regardless of their genuine interest in it.

AI creates an urgent need for corporate executives to implement an "AI strategy" into their business.

We are still very early on the implementation path.

If managers don’t capture the opportunity, their competitors will.

CEOs can’t be left behind.

A recent proof of the disruptive interest in AI comes from the latest results of , which provides chips needed to train and run AI models.

Its Data Center unit delivered in FY24, a 217% YoY growth to almost $50bn:

3. Partners can't miss the opportunity

In 2021, Palantir didn't have a mature partnership ecosystem. Now, according to its website, Palantir has 21 partners, which include the 3 key cloud providers (AWS, Azure, GCP) and the biggest consulting firms (Accenture, Pwc, KPMG).

These partners are resellers for Palantir’s solutions.

Once there is striking evidence that Palantir is in hot demand, these partners have a strong incentive to push Palantir's offering to their clients so that they get reselling fees.

From Palantir's perspective, partnerships are crucial to:

• boost sales at scale;

• reach also smaller companies;

• grow at a very low marginal cost.

I learned that channel partners could count up to ~70/80% of the total software sales for established B2B software companies.

Given how recent most of Palantir’s partnerships are (the website has just been created), I believe the channel partner impact is still very low, meaning there is an untapped growth potential.

By seeing Palantir US Commercial growing 70%, partners can't miss the opportunity to talk Palantir to their clients.

At this point, Palantir has already demonstrated enough successful cases in virtually any industry to feed this loop.

Conclusion

The recent spike in AI interest is not only positive for the stock, but it can also transform the growth trajectory creating a powerful feedback loop, potentially empowering growth above 30%.

“AIP is the future of our company, and we believe that it will become the dominant platform for the entire industry.” - Alex Karp, 2024 Letter

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☕️ Italian coffee will allow me to spot asymmetries!

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Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy, any securities or investment products.

After nearly two years and over 150 articles, I'm returning to the basics.

In the early days of Palantir Bullets, the web was saturated with introductory pieces on Palantir ( ) , prompting me to delve directly into the financial intricacies. However, Palantir has undergone significant transformations, as has its pool of investors.

This shift leads me to believe that much of the existing information is either obsolete or lacks the depth required to properly inform potential new investors.

Refreshing this information could also provide current investors with an updated and comprehensive understanding of the company.

👋 Hi, I’m Arny . Please hit the ❤️ button if you enjoy today’s article.

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What is Palantir?

First, let me briefly introduce Palantir.

Palantir is a software company aimed at tackling the most difficult problems of government organizations and companies, from targeting the general of enemy troops with satellites to helping the vaccine distribution during a pandemic or dramatically improving the efficiency of an oil drill.

In particular, we could describe Palantir as software to:

• integrate and have all data in a single pane of glass called “Ontology”;

• understand data with business analytics;

• create and manage AI models;

• build easily tailored software applications on top of it to drive efficiency;

• implement decisions and record the impact for future recommendations.

Palantir is not a simple software application. It is an operating system that makes the digital transformation from an idea to a reality, regardless of the industry.

The consequence is that Palantir’s TAM is essentially limitless.

Unlocking the power of Lego bricks

If this sounds complicated, here is an analogy with Lego (h/t @PalantirChad) :

We can think of Palantir as the platform that helps you make sense of your unstructured Lego bricks so that you can quickly find specific pieces when you need them.

However, Palantir doesn’t only help you organize your bricks by color in a visually appealing way. Palantir also provides the tools to:

• build new things with the arranged Lego;

• show you step-by-step instructions on how to build them;

• come up with new ideas by combining items differently.

By performing these tasks, Palantir products can enable value in the order of billion dollars:

The core idea is that once you have a full understanding of the operating context, be that a battlefield, a plane, or your entire organization, you can make effective decisions backed by reliable data.

Palantir helps any entity improve its decisions and, therefore its output.

When we say “Palantir” we refer to a platform, but, in reality, each product is comprised of hundreds of products.

Despite this, it was only in 2021 that Palantir started selling these granular services as modules rather than a monolithic product to facilitate sales.

Let’s go straight to the heart of the business.

Palantir products

Palantir has two core platforms, Gotham and Foundry, which are supported by two additional products which are transversal to the Government and Commercial side.

Here is a quick explanation:

• Gotham: the operating system for Governments, focused on decision-making in high-stakes environments. Gotham’s key use cases include:

  • managing military operations, from mission planning to enemy targeting;

  • providing antiterrorism intelligence;

  • supporting disaster response like a hurricane or earthquake.

• Foundry: the operating system for the modern enterprise. Foundry can power organizations in any sector and is currently deployed among more than 40 verticals. Different from many SaaS products that target a specific tier of operators, Foundry’s goal is to empower all employees of the organization, be they technical operators, business analysts, or C-suite decision-makers. As Windows OS makes PCs usable, Palantir Foundry empowers enterprises to unleash the power of their data. A few examples of Foundry usage:

  • facilitate the production of Panasonic batteries,

  • ramp up production of the Airbus A350,

  • and help BP extract more oil at a fraction of the cost.

Here is a short video showing how Foundry empowers Energy companies:

• Artificial Intelligence Platform (“AIP”): the newest product aimed to help clients surf the AI revolution by operationalizing Large Language Models (“LLMs”) like ChatGPT or LLaMA. These models are powerful but when applied to a business context they pose operations at risk by providing wrong answers (“hallucination”). AIP is a module that integrates with the other Palantir platforms. With AIP companies can leverage the strengths of LLMs while knowing that models provide reliable answers and support to operations while respecting guardrails. The reliability of AIP lies in the ability to connect with the digital twin of the organization (“Ontology) and provide tools to “instruct” the models. In particular AIP:

  • helps create virtual AI assistants that could provide in-platform help in the form of chat on queries and on building data pipelines and applications from natural language descriptions (“AIP Assist”);

  • construct agents to automatically perform anything from alert remediation and scheduling to other common enterprise tasks (“AIP Logic”);

  • orchestrate multiple AI agents created with AIP Logic which help the operator’s decision-making process with proposals and scenarios (“AIP Automate”).

  The video below shows how AIP could generate a significant advantage on the battlefield:

The video by Chad Wahlquist below shows how effectively AIP can help decision making in critical environments:

• Apollo: is the brain behind the Palantir platforms. Initially developed to facilitate updates of Gotham and Foundry, Apollo delivers and manages software at scale in an efficient manner. Palantir started commercializing this platform in 2022. While the other platforms are meant to be used by potentially all operators, Apollo targets software engineers to make their lives easier. In particular Apollo:

  • facilitates software continuous delivery, even at the edge;

  • ensures the software is compliant and secure;

  • unlocks multi-cloud by allowing to write code once that works in any cloud (AWS, Azure, or GCP).

Last year I wrote a dedicated article on Apollo, explaining how its freemium model can facilitate sales toward IT departments:

Below you can also find a video explaining Apollo:

Conclusion

“The problems and needs of an organization often change before the software can even be deployed. Our partners require something more. They need generalizable platforms for modeling the world and making decisions. And that is what we have built.” - Alex Karp, Palantir CEO

Palantir is a software company tackling the most difficult problems of government and commercial entities.

Tough problems are big problems by definition. So it is the potential opportunity we face as investors if Palantir can contribute to solving them.

If this article helped you better understand Palantir please hit the ❤️ button and consider supporting my research with a paid subscription.

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Yours,
Arny

Reach me:

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• LinkedIn: Arnaldo Trezzi

Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy, any securities or investment products.

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Since Palantir became listed the dream of the “trillion-dollar company” has been persuasive. In 2021, when the Market Cap was ~$50bn, CEO Alex Karp claimed:

“There is no reason this company should not be 20 times bigger”. - Alex Karp, Palantir CEO

While the sentence probably referred to Revenue, which was ~$1.5bn at the time, most investors saw it as a hint about Palantir potentially reaching a $1 trillion market cap.

This sparked substantial debate.

Does Palantir need a consumer product?

I say NO!

Since 2020, Palantir investors seem to crave a Palantir “consumer product,” maybe a sort of digital assistant that helps us make better decisions while ensuring military-grade security.

While I consider the idea fascinating, I consider it a mere utopia for these reasons:

• B2B and Government are already complicated enough to dominate;

• Consumer products are centered on a completely different platform than B2B, where Palantir has no experience, nor has shown interest in pursuing.

• A personal assistant for consumers would be completely out of the mission of becoming the “Operating System of the Modern Government and Enterprise.”

As a consequence, I believe it is extremely likely, that at a certain point an external company, entirely focused on B2C could leverage Palantir’s AIP and its security level to build a personal assistant service, rather than Palantir actively pursuing this path.

On the other hand, Palantir surprised us so many times, so never say never.

Does Palantir need a consumer product to reach a $ 1 trillion market cap?

Most of my X audience disagrees with my view, based on the observation that the big tech companies, now under the “Magnificent 7” acronym (Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft, and Tesla), all have a B2C component.

The B2B market is considered “not large enough” to allow a company to reach the 13-figure goal. Is this really the case?

The purpose of this article is to provide a perspective based on raw numbers, which could serve as input for discussion, without including precise estimates.

$1 trillion worth of ingredients

To address the question of whether Palantir needs a consumer product, it can be helpful to evaluate what Palantir requires to achieve in terms of business results to reach a $1 trillion market cap.

In this assessment, the dilution has no impact as we focus on market cap terms. Dilution is crucial to consider if one is interested in per-share numbers.

Given the “normal” historical Price/Sales ranges, we observe Palantir could reach a $1trn market capitalization in different ways:

• 10x Sales on $100bn Revenue;

• 15x Sales multiple on $66bn Revenue;

• 20x Sales on $50bn Revenue.

Considering the most optimistic case of 20x Sales multiple on $50bn Revenue, Palantir would still require Revenue to 25x the current $2bn. Long way ahead!

Does Palantir have any chance to 25x its Revenue over the long run?

The biggest driver of Palantir's growth is the AI market, which is already a $170bn market, set to reach $1trn in 2032 growing at a ~23% CAGR.

I went into more detail on Palantir’s role in AI in this previous article:

Under the very optimistic assumption of 30% CAGR, Palantir could reach $50bn Revenue in ~12 years. This would represent ~2% of the AI market size by that time, which is a small fraction of the Total Addressable Market. I consider this a hint that the market is “big enough.” Ambitious, but not impossible.

Let’s take one step forward and try to have a sense of what is needed to reach $50bn Revenue.

To reach $50bn Revenue Palantir could require a combination of:

• 25k customers paying an average of $2mn per year;

• 10k customers paying an average of $5mn per year;

• 6.3k customers paying an average of $8mn per year.

Also here, I would call any combination, ambitious, but not impossible if we consider that:

• in 2020 the average revenue per customer was $8mn;

• the “pie” Palantir could capture naturally grows and the corporate world becomes more and more driven by software;

• inflation and pricing power support gradual price increases.

Regardless of the combination needed to reach $50bn Revenue, those numbers are achievable only if Palantir becomes a truly dominant and recognized industry leader, legitimatizing its role as the “Messi of AI.”

So far we know Palantir can unlock immense value for customers thanks to its AI offerings, but it is very far from becoming a “standard.”

The fact that these ambitious numbers don’t seem absurd, in my view, supports the idea that the B2B component is “enough” to drive the business to $50bn in Revenue.

Note: $1trn being “possible,” doesn’t mean that it is a certainty. To reach this goal we need execution, execution, execution.

Palantir goes wide and deep

There are further considerations that could help assess the size of Palantir’s potential.

Salesforce , the biggest pure B2B subscription SaaS generates $20bn Revenue and still grows at 10%-20%. This is a hint that a B2B company can reach significant Revenues without a B2C component.

Furthermore, Salesforce is a horizontal SaaS, meaning that its solutions are targeted to a wide audience of business users, notwithstanding their industry. So, whether you work for Coca-Cola or Airbus, the Salesforce platform is approximately the same.

This brings us to a peculiar observation:

if Salesforce can reach $20bn Revenue by having horizontal SaaS products, a company offering both horizontal and vertical software specific to industries can exceed those $20bn Revenues.

Veeva is probably the most classic example of vertical SaaS, which we can call “Salesforce for Healthcare.” We first mentioned Veeva explaining how Palantir monetizes Skywise:

Veeva operates in healthcare only and generates ~$2bn Revenue, which is approximately the current Revenue numbers of Palantir.

This is a hint that even vertical B2B software, typically considered “small niche players,” can reach substantial Revenues if they become the “standard“ of a sector.

Palantir is gradually proving that its capabilities are highly versatile and can help tackle problems in any vertical. No other company, to my knowledge, can offer such depth while being extended to almost any industry.

Palantir currently operates in more than 40 industries, offering both horizontal and vertical software:

In particular, what stands out for Palantir is its versatility: it can be deployed to:

• facilitate the production of Panasonic batteries,

• ramp up production of the Airbus A350,

• and help BP extract more oil at a fraction of the cost.

As a notional example, imagine if Palantir could get ~$2bn Revenues, like Veeva, from each of the ~40 sectors it currently operates in: Palantir could reach ~$80bn Revenue by serving its corporate and government clients alone.

While not providing precise estimates, these simple observations can help us see that Palantir has “enough room” to reach the $1 trillion mark with its B2B / B2G business alone.

Conclusion

The 1 trillion dollar dream will continue to inspire investors' minds. With some simple and raw considerations, we can see the dream could be reached without the need for a consumer product.

Yours,
Arny

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Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy any securities or investment products.

“Palantir is an AI imposter engaging in spurious games to inflate its books and obfuscate its less sexy role as an overhyped data consultant.” - The Bear Cave

This is how The Bear Cave, one of the most prominent Substack publications focused on companies’ misconduct with over 48k subscribers, described Palantir.

However, these allegations are not only misleading but denote a severe lack of understanding of the company.

In this article, I’ll show why the key arguments raised in the report lack substance and look more at an attempt to capitalize on the rise of interest in Palantir rather than providing an accurate analysis.

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“Palantir is a black box”

This argument became popular due to Jim Cramer's comments at Palantir DPO.

“I think it's too much of a black box to get a real read on the business so be careful” - Jim Cramer

While the assertion seemed plausible back then due to the relatively little and mediocre information available, almost three years later, there are no excuses:

• Palantir hosted several demos, which can be found on YouTube;

• Palantir released a wide Foundry documentation on its website;

• Palantir allows everyone to get a base-level Foundry certification for free.

With the current information available, even people like me that don’t use the platform can understand what Palantir is and how the software is actually used.

In other words, laziness is the only excuse to ignorance.

Interestingly, despite seeing Palantir as a “black box where the process of seeking information might leave one with more questions than answers” the Bear Cave author is confident in expressing that Palantir is an “AI imposter.”

“Palantir is an AI imposter”

According to the report Palantir is misleading investors by seeing itself as an “AI leader.”

The most prominent IT research providers back this leadership position:

• Forrester;

• Gartner;

• IDC.

Therefore, affirming that Palantir is an “AI imposter” implies that all the research providers mentioned are impostors as well as they would fail in performing their core operations.

Unfortunately, the Bear Cave doesn’t provide evidence that invalidates the judgment of the mentioned IT research providers.

Furthermore, the report was published on the exact day of AIPCon, where some of the key Palantir clients showcased their results and satisfaction by using Palantir’s AI platforms.

In the picture below, you can see key representatives of Panasonic Energy, HCA Healthcare, and Cleveland Clinic sharing their satisfaction with the Palantir platform.

If Palantir was an AI impostor, these companies and executives would be impostors as well for promoting results that are not true.

If everyone is lying about Palantir’s capabilities the US would be at serious risk by making it run with crucial federal agencies like:

• the National Nuclear Security Administration;

• the Army;

• the Centers for Disease Control and Prevention.

If Palantir were an “AI impostor,” we would accept that all the institutions above are also impostors for failing to detect Palantir’s fraud.

Edwin Dorsey, the author of the report, is surely a brilliant writer. However, his background doesn’t seem adequate to properly assess Palantir’s AI capabilities.

“Palantir is a consultancy”

The Bear Cave reports that while Palantir presents itself as an AI leader, it is just a “glorified consultancy company.”

Palantir does have a consultancy component in its business when they initially solve a customer problem. Palantir’s Forward Deployed Engineers collaborate in strict relationships with customers like McKinsey or BCG consultants do. However, differently from the companies mentioned, Palantir’s FDEs don’t only “consult,” they use Palantir platforms to actually solve a client’s need so that the customer becomes a regular user of the platform, which is the core offering.

What is defined as criticism, in reality, is a key differentiator for Palantir as discussed in the previous article:

“Thanks to their proximity to problems, FDEs generate crucial insights that are not only critical to help solve similar problems but also develop new features in Palantir which can subsequently be used to empower FDEs and clients.” - Palantir Bullets

The result is that saying “Palantir is a consultancy” is as wrong as saying “Apple is hardware.”

A simple effective way to deny this allegation is by comparing Palantir’s ~80% Gross Margin with that of reference B2B Software companies that also have a minor component of consultancy in their business:

• ServiceNow: 79%;

• Salesforce: 74%;

• Snowflake: 66%.

Consultancy companies have much lower Gross Margins:

• Accenture: 32%;

• Leidos: 13%.

• Jacobs Solutions: 21%.

If Palantir were mainly a consultancy company it would not have ~80% Gross Margin similar to ServiceNow where only 3-5% of the Revenue is generated from Consultancy. If Palantir offered a misleading allocation of costs then that would be an accounting irregularity.

The Bear Cave report does not provide evidence of accounting irregularity regarding the method Palantir reports its costs.

“Palantir inflates its financial numbers”

Palantir is accused of inflating its financial metrics by making investments in companies and requiring those companies to buy Palantir products.

The criticism is related to SPACs, which we have been widely discussing for one year here at Palantir Bullets. While the criticism is legitimate, the assertion is misleading.

Palantir paid ~$400mn in overall SPACs investments and received commitments for ~$700mn of Revenue for the usage of Palantir Foundry over the contract length.

The move was surely unusual in the corporate context, but the report does not provide evidence of an eventual illegality. Palantir invested in the companies at the same market conditions while also having a commercial agreement for the usage of the platform.

As seen in the latest results, even if Palantir sold the shares of most of the SPACs, these companies that are not bankrupt are still clients. This proves that the investment agreement and commercial agreements were separate as Palantir reported in a reply to the SEC Division of Corporate Finance.

While it is true that SPACs generated a Revenue boost, declaring that Palantir “inflates” creates the deception that this is the normal way the company operates. As a matter of fact, Palantir has been growing its Commercial Revenue and customer count by ~22% and ~62%, respectively, in Q1 excluding SPACs.

Furthermore, Palantir assumed both the risk of losing capital and the commercial risk from companies in a relatively weak condition. A risk that manifested itself creating not only losses in terms of capital but also the loss of the commercial contracts from the companies that failed.

Accounting irregularities

The Bear Cave hints at accounting irregularities from a sentence in the 10-k, which was called a “critical audit matter” by the author:

“Management applies significant judgment in identifying and evaluating any non-standard terms and conditions in customer arrangements which may impact the determination of performance obligations or the timing of revenue recognition.” - Ernst & Young, Palantir’s auditor, Palantir 23Q1 10-k.

What’s defined as a “Critical audit matter” of the last 10-K is just a regular text written since the 20Q4 10-k, which was already present before the first SPAC investment was performed.

Very similar wording can be found on Salesforce’s 10k. I am not a CPA, but I don’t see evidence of irregularities, only a warning where potential problems could arise.

“Palantir buys its way in”

The report eludes to hints of misconduct as Palantir attempted to buy their way into the UK NHS by attempting to purchase equity stakes from founders who supply the UK NHS.

If this is illegal, it would be helpful to be shown some evidence, however, no evidence of illegality was provided in the report.

“Palantir sales management is straight up mentally ill”

A further point raised is related to the complaints of salespeople on Glassdoor.

Negative comments from salespeople are not enjoyable but not surprising given that Palantir has been very “engineering” focused and reluctant to hire salespeople.

Furthermore, underscoring the salespeople without considering what the clients say about the product, which is not a mere consultancy project, misses the full picture.

Product reviews on Gartner rank Palantir among the best products. Therefore, I see the critics on Glassdoor as just a negative, solvable data point that doesn’t affect the real Palantir thesis.

Executive resignation

The resignation of Jeff Buckley as Chief Accounting Officer is underscored as a sign of Revenue stress.

“Palantir’s Chief Accounting Officer, Jeffrey Buckley, resigned from his role one day after the 10-K was filed. Mr. Buckley served as Chief Accounting Officer for about two and a half years.” - The Bear Cave

While an executive leaving is not a positive sign, it is not necessarily negative. Contextually with Jeff's departure, Shyam Sankar was nominated to CTO from COO. This could be a sign that the management recognized the mistake with SPACs and decided to move on.

Valuation

Given the considerations above, Bear Cave suggests that Palantir should trade at a low revenue multiple in line with a consultancy company, rather than the current ~13x EV/Sales. In the previous article, I showed how Palantir's financial numbers are, differently from a consultancy business, very scalable thanks to the software component.

Saying Palantir should be valued as a consultancy company is the equivalent of saying Apple should be valued as HP (HPQ) because they are a hardware company.

While it is true that Apple mainly sells hardware, ignoring that most of the value comes from a sublime combination of hardware and proprietary software would be a failed representation of reality.

While it is impossible to predict how the stock will move, the validity of the accusations will emerge over time.

Conclusion

The Bear Cave report lacks understanding of the business and its assertions seem to be a vain attempt to capitalize on the relative popularity of Palantir after its +130% YTD performance.

I leave space for discussion about whether leveraging an audience of almost 50k with false claims should require further scrutiny.

I frankly hope short sellers will at least put some effort into future reports.

“The Bear Cave is a bear cave. They can stay in their bear cave.” - Alex Karp

Yours,
Arny

When the mission is critical and there is no room to fail, you don’t call normal troops. You call Special Operations.

Special Ops are trained to perform in whatever environment to get the job done.

Their unique skill set makes them the most elite soldiers. In a similar way, Palantir’s business is built around engineers that require the same spirit and solve previously unsolvable problems. Forward Deployed Engineers (“FDEs”) deploy Palantir’s software to solve the most critical issues and help clients react to shocks.

Understanding the centrality of FDEs’ role in Palantir’s business is critical to capture the rationale behind certain Palantir business decisions.

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Why FDEs are the pillar of the model

Internally FDEs are called “Delta”, which is probably a reference to the Delta Force, the most elite team of special operators specialized in anti-terrorism, the field where Palantir was initially deployed.

FDEs deploy and customize Palantir’s software platforms to customers with the goal of achieving technical outcomes.

Their success is therefore measured by the value they create for customers.

This setting produces crucial features:

• Efficiency: FDEs have the incentive to find the most effective way to solve the problem.

• Pricing Power: successful achievement of previously unsolvable problems gives Palantir high pricing power.

• Trust: an operative output is worth more than 100 PowerPoint slides.

A happy client will be prone to keep the implemented solution, generating recurring Revenues for Palantir, and expanding the relationship with Palantir for further use cases.

Palantir sells outcomes.

The source of Palantir’s Moat

Karp underscored the importance of access to the battlefield when it comes to military technology, but the same principle is translated in the commercial space by working closely with corporate clients and having direct exposure to their pain points.

“These things take five six years to build if you're very good at it and you need access to the battlefield. You can't build these things in the lab.” - Alex Karp, REAIM

Thanks to their proximity to problems, FDEs generate crucial insights that are not only critical to help solve similar problems but also develop new features in Palantir which can subsequently be used to empower FDEs and clients.

In other words, FDEs produce precious R&D while getting paid.

Solving a critical new problem for the first time is demanding, but that solution can be used to solve similar problems without the need to reinvent the wheel each time. This way, Palantir compounds knowledge of already solved problems.

This brings us to a fascinating corollary:

The more Palantir solves problems, the more it unlocks the ability to solve further problems while scaling the solution to the existing customers.

This is the source of Palantir’s moat.

If a problem was previously unsolved, it means that commercially available software solutions were unsufficient to tackle it.

Therefore, if Palantir actually solves the problem, it naturally leads the competition while having a software solution that works.

From problem to product

By building software to solve problems, Palantir develops an increasing number of use cases that become modules inside Foundry and Gotham.

For instance, in the picture below you can see the solutions Palantir has developed for the insurance industry. These products are developed by working closely with its Insurance clients/partners like Swiss Re, proving again the fact that Palantir should be considered an Enterprise Network (Palantir: The Biggest Networks Start Small).

FDEs in Palantir’s value chain

The following image could help better visualize FDEs’ critical role in Palantir’s value chain.

We can synthesize the process as follows:

1. FDEs solve clients’ problems by leveraging Palantir platforms as a Swiss army knife with a multitude of possible use cases.

2. FDEs give feedback internally to Software Engineers (“DEV”) on the use cases they are tackling.

3. DEVs improve Palantir platforms by building archetypes to facilitate the solution of similar problems in the future. It’s like adding another blade to the Swiss army knife.

4. The new tools are scaled to existing customers or used to generate an impact on new potential customers.

Thanks to this unique structure, Palantir is able to create software that works ahead of other software companies.

Becoming the industry operating system

Palantir seeks to solve the most complex problems as a source to build new products.

Therefore, Palantir seeks to work with the biggest and most complex organizations.

If they can solve their problems at scale, they can develop solutions that naturally work also for less complicated entities.

By partnering with the most complex organizations Palantir develops the best products.

This allows us to better understand why Palantir has preferred having a few relevant, big clients that are leaders in their sector rather than going mass market like other peers have done.

By building the solutions that affect the leader of each industry, Palantir can become one step closer to becoming the “operating system of the modern organization.”

Conclusion

By recognizing the importance of FDEs, we can see that for Palantir, success is not solely dependent on acquiring clients, but on identifying suitable partners who can contribute valuable research and development towards addressing complex industry-wide challenges.

The heavy reliance on FDEs, however, is not all roses as it presents serious challenges to Palantir’s business model. We will uncover this in the coming articles.

Yours,
Arny

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Dear Mr. Market,

I know you suffer from a severe form of pessimism for software companies, which were your beloved ones in previous years. I am sorry about your emotional swings. However, as an investor, my job is to spot asymmetries generated by your instability and exploit them for future rewards.

In this letter, I will explain why your short-term attitude is over-penalizing one company that has the potential of becoming a dominant player in the decades to come.

First, let me briefly introduce Palantir.

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Palantir: a crystal ball to unlock hidden secrets

The biggest obstacle to a good decision is seeing the information you truly need. Palantir can be considered a crystal ball that helps identify patterns, connections, and insights that were once buried deep within complex and disparate datasets.

Palantir’s underlying idea is that every problem is a data problem.

Tough problems like “How to react to an enemy military escalation?” or “How to prioritize the vaccine distribution?” seem unsolvable, unless you have the right data in front of you and can accurately assess the impact of each decision. The way Palantir transforms this problem is by providing governments and companies with platforms that act as an operating system. Just as the Windows operating system sits at the core of a computer, Palantir sits at the core of an organization's data infrastructure, organizing it in a way that allows users to access and analyze data from a wide range of sources.

Data can reveal the answers to the toughest problems, but in order to perform good decisions in a timely manner, you can’t waste time sorting through 1,000 dislocated sources. Palantir creates a “digital twin” of the company data, which becomes the reliable “single source of truth” that accurately represents reality. Palantir calls this digital twin “Ontology” and thinks of it as the unique representation of a company in its component and relationships.

The ability to integrate immense and various sources of data to create an Ontology is Palantir’s key force. This system is applicable to any sector, from improving the production of an Airbus A320 to optimizing Ferrari F1 races, or even spotting terrorists.

Palantir's reach can extend where data is; everywhere.

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You underestimate Palantir. Do not

There are 5 key points that sustain my thesis that Palantir is set to become a dominant player in the software space:

• Palantir is an antifragile company in an unstable world. Dislocations increase clients’ need for Palantir. In particular, Palantir is reportedly tipping the balance of the war in Ukraine, unlocking an immense opportunity for its Defense offering as NATO countries are dramatically increasing their military spending (Palantir Government: It’s Now or Never). This concept expands to whatever natural or geopolitical shock. For example, Palantir helps companies dealing with supply-chain disruptions, the NHI with hospital allocation, and Covid vaccine distribution. When a few months ago Turkey was affected by an earthquake Palantir promptly intervened.

Palantir acts as “software seals” in the moments of need.

• Palantir is already an AI leader. Palantir ranks #1 in the world for AI Software Platform Sales by IDC (Palantir AI AI AI), ahead of Big Tech. Amid the so-called “AI race,” Palantir doesn’t seek to compete in the creation of AI models like OpenAI with ChatGPT but to become the infrastructure layers used to train and manage AI/ML models. We can consider AI models as solitary lightbulbs: they illuminate a single room in a single house at a time. However, in order to illuminate an entire skyscraper having lightbulbs is not enough, you need a grid.

Palantir is providing the grid on top of which AI models are trained and run.

• Palantir is a superior SaaS in the making. Despite being relatively smaller, Palantir still shows unit economics similar to those of Servicenow, which is ~4x bigger and considered the most efficient B2B SaaS (Seeking the Alpha - PLTR vs. NOW). The top 20 clients spend on Palanir almost ~$50mn/year on, a clear sign that Palantir provides them dramatic value. Furthermore, in the US, Palantir has only 150 of the top 1,000 companies that are current clients and they use Palantir in “all parts of the enterprise.”

Palantir’s room for growth is immense.

• Palantir can defy gravity thanks to network effects. The more Palantir acquires clients the easier is it to acquire further ones by leveraging the reputation and connections of the existing ones (Palantir: The Biggest Networks Start Small). Moreover, each client can develop on Palantir vertical platforms which can become the Operating System of any sector (PLTR Platforms Unleash Network Effects). The most notable example is Skywise, built with Airbus, which is used by +140 airlines, involved +10,000 aircrafts, and is used by ~27,000 users (Palantir’s Skywise: the Run Way to Monopolize the Sky).

Network effects support growth at scale.

• Palantir is built on the battlefield. While many SaaS experts criticize Palantir for being a “consultancy,” the reality is that Palantir deploys its Forward Deployment Engineers as a way to build Palantir solutions by directly solving the clients’ problems. Rather than developing a product and hoping it works, Palantir built its product on the battlefield, literally in the case of military software, by solving their biggest problems. This proximity helps them develop solutions that work years ahead of the competition, like Metaconstellation, which is currently deployed by Ukraine (Palantir’s $140B Opportunity To Monopolise Space).

Palantir builds solutions that work ahead of time.

Palantir faces risk

Investing in Palantir faces three key risks:

• Execution: Palantir’s mission of becoming the operating system for the modern world is clearly ambitious and inevitably will crash with the expansion of Big Tech, in particular Microsoft Azure, AWS, and Google Cloud both in terms of offering and talents. This risk is mitigated by the partnerships Palantir is striking with its competitors. For instance, Palantir counts Lockheed Martin as a client and has just announced the expansion of its partnership with Microsoft to expand Cloud offerings to the Public Sector.

• Public perception: given the controversial nature of its early work with the CIA and ICE Palantir has long been seen as the “controversial spy company that sells data.”While these allegations are false since Palantir doesn’t collect any data, just helps process it, they can generate opposition from activist groups. In the UK an activist group obstructs Palantir from obtaining a $480mn contract with the NHS despite having demonstrated outstanding operating successes (Palantir Bullets #16).

• Dilution: while not an operating risk, dilution is a true risk for investors (Why 99% of PLTR DCFs Fail) as in the past Palantir has been a highly dilutive company characterized by strong stock-based compensation. Dilution is still elevated compared with traditional companies, however, the trend now is clearly positive (PLTR Dilution: One Step Closer [Q4 Tracker]) as Palantir achieved its first GAAP profitable quarter (Palantir's GAAP Profits: Fake Yet Good).

You are too pessimistic

At $8 per share, which corresponds to a $14bn Enterprise Value, Palantir trades at 7x EV/Sales. I consider this valuation an asymmetric opportunity:

• The current ~20% Revenue Growth assumption implies ~0% growth in clients. Analysts assume Palantir’s Revenue will keep growing by ~20% in the coming years, which seems over-pessimistic since the existing clients have been growing, on average, ~20% per year. Palantir can exceed that target thanks to the newly acquired clients (Palantir $4.5bn Revenue in 2025: a Mirage?).

• Palantir trades at a wide EV/Sales discount vs. Servicenow, which trades at 10x EV/Sales. Servicenow is currently trading at a premium for sustaining higher growth while preserving EBIT adj. margins. However, Palantir multiples can expand and trade in line with Servicenow’s by accelerating its growth again (Palantir Slowdown: Has the Worst Passed?).

• Analysts are using an over-penalizing WACC of 13%. There is no reason why Palantir’s future FCF should not be discounted at the same rate as peers Snowflake, Servicenow, and Datadog for which analysts use 11% WACC (Palantir vs. the Wall Street Scam).

Even assuming there is no growth acceleration, no multiple expansion, and the same WACC, Palantir’s stock can compound at ~15-20% following the Diluted Revenue growth, which would still be ~2x the average long-term growth of the S&P500.

Palantir: long term evolution is rational

Given the above, I believe you are wrong about Palantir. As a consequence, I have ~80% of my equity portfolio in Palantir with an average price of $8.

While in the short term, there are chances your depressive mood will continue, in the long term the weight of the contribution that Palantir is providing to the world will outweigh your pessimism.

“As for the stock market, at times it likes us, at other times not… Long-term evolution is rational, not year-on-year.” - Alex Karp, Palantir CEO

Cordially,
Arny

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AI is the word du jour: CEOs can’t avoid mentioning these two letters in their earnings calls.

The excitement from the OpenAI’s $30bn valuation from Microsoft’s capital raise sparked an interest in AI that was reflected in the public markets, where having an “AI” ticker is enough to be perceived as valuable, as C3 AI illustrated.

By making one step back, we can see why investors are excited: the size of the AI Software Market is immense and set to grow at a rapid pace.

According to Precedence Research, the AI Software market is already a $140bn market, set to reach $1trn in 2032 growing at a ~23% CAGR.

This coincides with what Alex Karp said in a recent interview.

“Our TAM is north of $900bn” - Alex Karp, Palantir CEO on CNBC

The world’s awakening to AI already has an effect on Palantir, starting from the website.

Palantir changes clothes

Palantir changed its homepage in mid-February clearly concentrating on its AI proposition.

The word “AI” appears now 10x on Palantir’s homepage while there were no mentions in the previous version. This shows a clear intention from Palantir to capitalize on the AI trend as many companies are trying to do. The following question arises:

Is Palantir just window dressing for the hype or is there actually any substance?

Palantir: the small elephant in the room

Public awareness focuses on the consumer side of AI in the form of Generative AI in the like of ChatGPT or the image generator DALL·E. Meanwhile Wall Street focuses on semiconductors companies like Nvidia and AMD or firms with “AI” in the name. Even better if AI is in the ticker! However, Wall Street is missing the small elephant in the room.

Palantir is already an AI leader.

In the last article (Palantir $4.5bn Revenue in 2025: a Mirage?) we showed that the market underestimates Palantir’s growth assuming a ~20% CAGR for the coming years. In other words, Wall Street expects Palantir to grow just in line with its underlying board market rather than the AI-Centric Software, to which Palantir’s offering belongs and which represents the fastest growing category at ~32% expected CAGR.

The certifications Palantir obtained in 2022 will play a crucial role in facilitating its growth:

• Forrester named Palantir a “Leader” in AI/ML Platforms thanks to its ability to build data-driven intelligence applications for complex use cases.

• Gartner Named Palantir a “Visionary” in the Magic Quadrant for Data Integration Tools, which is a crucial component for AI development.

• IDC ranked Palantir #1 in Artificial Intelligence Software Platform Sales with $1.4bn Revenue. In this $14bn segment, which is a subsegment of the broad AI Software market, Palantir is ahead of tech giants with a ~$1trn market cap.

According to these studies, Palantir already covers a leading position in AI.

Interestingly, the $1.4bn Revenue from AI Platforms Palantir generated in 2021 represents ~90% of the Total Revenue for the year. We could hypothesize that the remaining 10% is related to “Professional Services.” This proves a crucial point in Palantir’s investment thesis:

Palantir is a pure AI software company.

The shift from a very “consulting” model towards a “pure software” business is what determined the impressive shift in the metrics that I underscored in the previous article (Palantir: This time is different). Certainly, the internal use of AI has played a critical role in this transition. For instance, Hyperauto is a Software Defined Integration tool that automatically integrates ERP Datasets. This integration usually lasts months or years using intense human effort and has now been reduced to hours of work.

Has Palantir always been a leader? Let’s check how Palantir’s IDC ranking evolved over time.

Palantir “AIvolution”

In the following part of the article, I show how Palantir’s ranking evolved over time and why Palantir is better than just “AI”.

Since 2015 Palantir has been ranked #2 in the IDC ranking for Worldwide Cognitive/AI Software Platform Revenue with almost half the revenues of IBM.

In 2017 Palantir was recognized to have generated $71mn Revenue from “AI Platform sales”. This represented only 13% of Palantir’s FY Revenue meaning that the remaining component included Professional Services and Non-Platform sales (eg. Application Development & Deployment).

In 2018 the competition intensified: Palantir lost ground while generating $75mn Revenue from AI Platforms, representing a modest 5% YoY. On the other hand, IBM led the ranking while growing its AI Revenue by 27%. SAS and Microsoft leapfrogged and obtained the #2 and #3 position more than doubling the previous year's sales.

As of 1H 2020, Palantir appeared in the #3 position in “AI Application Development & Deployment” behind Microsoft and Google. However, Palantir did not appear in the top#3 for AI Software Platforms.

How did the shift to the #1 position happen? I believe 3 main components contributed to Palantir officially becoming the top “AI Software Platform vendor”:

• Software-defined data integration (Hyperauto): helps the ingestion of data into days or even hours rather than months/years.

• Apollo: helps the continuous deployment of models.

• Ontology: helps write back the decisions into the operations.

Palantir is better than just “AI”

While all organizations want AI to assist their operations, the implementation crashes against a harsh reality:

85% of traditional AI and ML projects are set to fail.

This is the staggering statistic Gartner published. According to research, the problem of performing AI/ML projects is not limited to building or developing the models, but to make them part of the operations with correct outcomes.

Models are valuable only if they can generate consistent, long-term business value.

However, the implementation of AI/ML models in operations fails for a number of reasons. Here are the main ones:

• Subject matter experts can’t contribute to the development process, which is highly technical unless they are provided with low/no-code tools;

• Models quickly become stale and inaccurate if not backed by dynamic real-time data;

• Inability to produce proper documentation, process, and structure to understand how AI choices are performed.

Palantir Foundry solves these problems

In particular, Foundry helps the implementation of AI/ML models by providing:

• a reliable data foundation;

• a representation of an institution’s decisions;

• an infrastructure to learn from every decision made.

In other words, Palantir tackles every stage of the AI lifecycle by:

• Providing the tools for creating a high-quality data foundation from which to start building models = Data Preparation. This consists of building a digital twin of the enterprise, which is represented by the “ontology.” The data objects integrated into the ontology are used to train the ML models.

• Help clients create new models or incorporate existing ones = Model Development;

• Incorporate models into the ontology = Model Integration;

• Integrate models into operational applications = Model Operationalization. Most projects fail at this point as the models fail to accurately react to reality. Thanks to the ontology, Palantir clients can build models that accurately reflect the operating reality, have high predictive power and can send results to the operations in order for enhanced execution.

A common misconception about Palantir is that it seeks to build AI models. While Palantir provides some template models, this is not its focus. Palantir seeks to become the AI infrastructure player that helps companies successfully operationalize their AI/ML models into their core business.

While most focus on gold, Palantir is providing high-tech shovels.

“We build Iron Man suits, not robots” - ‘21 Foundry Demo

Moving forward, we will dive deeper into what these considerations may imply for Palantir and its projected market share.

Yours,
Arny

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In the previous article (Palantir’s Money Machine Needs Scale) we underlined that ’s Gross Margins provide crucial hints about its FCF potential.

If Palantir can keep scaling while preserving its Gross Margins, that would inevitably unlock GAAP profitability as the operating leverage kicks in.

But how does Palantir compare with its peers? How different is Palantir from the most successful B2B SaaS when they were at the size Palantir currently is?

Palantir vs. Servicenow vs. Salesforce

Palantir’s Gross Profit is currently in line with that of ServiceNow and well superior to that of Salesforce .

As a reminder, size for software companies is a favorable condition for margins.

Palantir, at ~77% GAAP Gross Profit, currently shows similar margins to those of ServiceNow, ~3.5x Palantir, in terms of Revenues, and much better than Salesforce, ~15x Palantir, in terms of Revenues.

Salesforce GAAP Gross Margins decreased over time as a result of competition and its aggressive M&A activity, which brought relatively more costs than Revenues.

As we mentioned in the previous article, GAAP Gross Margin includes SBC related to the Cost of Revenues.

By excluding SBC from the Cost of Revenues we can better visualize the FCF potential.

Let’s also add where Servicenow and Salesforce Gross Margins were at with ~$2bn Revenue, which is Palantir’s current run rate.

Consider that Palantir’s Gross Margin is currently under pressure. Palantir is expanding aggressively and providing its solutions, according to Karp, to Ukraine for free, which simply means for the moment costs without revenues.

Comparison at $2bn Milestone

We can obtain a meaningful comparison between Palantir, Servicenow, and Salesforce:

Palantir is set to achieve ~$2bn in Revenues with ~370 clients, 10% of ServiceNow’s clients, and ~35% of Salesforce clients.

This is a precious hint that Palantir has a long but prosperous path ahead.

FoundryCon just showed how small-cap companies like Integrity can leverage Foundry. I expect 2023-2025 to be the years of real expansion in the number of clients.

Notably, Palantir needed ~20/30% fewer employees than its peers to achieve ~$2bn Revenue. I consider this an additional sign that despite Palantir's talents being costly ( When will Palantir’s SBC ease?) they are capable of delivering superior results.

22Q3 Peers Comparison

For the sake of completeness. We can expand the comparison to Snowflake and Datatog , which I often use as comparable companies.

Datadog and Servicenow currently show best-in-class marginality among peers with a ~78% GAAP Gross Margin.

Below you can find the same chart related to the NON GAAP Gross Margins.

Palantir’s ~80% Gross Margin Adj. is second only to Servicenow.

Conclusion

Palantir is still relatively small but already shows clear signs of strength from the comparison with the most successful B2B SaaS. With the right execution, Palantir’s FCF is set to have a long way. I am excited to track and share this journey with you.

“We're going to stay small and nimble. We are hiring, but we're not like a body shop”. - Alex Karp, Palantir CEO

Yours,
Arny

View expresses are my own and do not represent Financial Advice in any way.
I own (many) PLTR stocks.

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In this article:

• Gross Margin Explained;

• SaaS El Dorado;

• Palantir Operating Leverage.

Not all leverage is bad.

Palantir announced it will release its 22FY numbers on the 13th of February. I will stream that live on my YouTube channel.

To arrive prepared, in this article, we will dissect Palantir’s most important metric that is shown in each earnings slide deck. Gross Margins are always highlighted in Palantir financials, but what exactly are Gross Margins, and why are they so crucial?

Gross Margin is a crucial metric because it hints at Palantir’s FCF potential.

By understanding how Gross Margin works, we can better assess if Palantir is not only increasing in size but also increasingly more profitable at an operating level.

To complement what we share here I highly encourage you to read what I call "the definitive guide of SaaS Income Statements" by .

OnlyCFO's SaaS World

How to Read Income Statements - Software Edition

Every investor, company leader, and aspiring leader should understand how to read an income statement (aka profit & loss or P&L). The income statement is a window into the performance of a company over a specific period of time by reporting on a company’s revenue and expenses…

Read more

3 years ago · 35 likes · 7 comments · OnlyCFO

Gross Profit

Gross Profit is calculated by subtracting the Cost of Revenue from Revenue.

“Cost of Revenue primarily includes salaries, stock-based compensation expense, and benefits for personnel involved in performing O&M and professional services, as well as third-party cloud hosting services, allocated overhead, and other direct costs”.

Palantir’s 10k.

In the case of Palantir, in line with other SaaS companies, the Cost of Revenue is made up of the following:

• Third-party cloud hosting like AWS, Azure, and GCP (“Cloud”);

• Professional Services (“Consultancy”);

• Operating and Maintenance (“O&M”).

Unfortunately, we don’t have the precise mix of the Cost of Revenue.

We can also see Gross Profit expressed as a percentage of Revenue. This favors the comparison with other companies in the sector.

Gross Margin = Gross Profit / Revenues.

As mentioned many times, SBC does not affect Palantir’s FCF but does affect GAAP financial numbers (When Will Palantir SBC Ease?). Therefore it is worth remembering the distinction:

• Gross Profit GAAP: includes the negative effect of SBC from Cost of Revenues;

• Gross Profit adj.: excludes the negative effect of SBC from Cost of Revenues.

The crucial thing to remember is that the higher the Gross Margin the more “buffer” for profits after expenses.

Down to EBIT Margin

From Gross Profit Adj. we can arrive at Operating Earnings Adj. (“EBIT adj.”) by subtracting the Operating Expenses (“OpEx”):

• Sales & Marketing (“S&M”);

• General & Administration (“G&A”);

• Research & Development (“R&D”).

EBIT Adj., can be considered a proxy to FCF with SaaS businesses like Palantir that have virtually no Capex as they don’t invest in physical infrastructure.

By subtracting the SBC related to the Cost of Revenue and Operating Expenses we obtain EBIT GAAP, which is negative and represents a ~13% GAAP Operating Loss in the Income Statement.

This clarity allows us to understand the engine that drives the numbers.

SaaS El Dorado

SaaS companies seek operating leverage.

SaaS businesses have relatively little Cost of Revenue, which is a variable cost that necessarily tracks the Revenue. Gross Margins tend to be very steady and slightly improve over time.

On the other hand, Operating Expenses have a high incidence and are mainly fixed costs, especially R&D and General&Admin.

“Operating leverage means do more with less”. -

Regardless of the size, SaaS businesses need substantial Operating Expenses in absolute terms to create products and market them, but their incidence gradually reduces as the business scales.

SaaS businesses require substantial scale to generate significant FCF.

Palantir's Gross Margin over time

Palantir's Gross Margin steeply increased in 2020, thanks to higher efficiency and Apollo (Palantir’s Apollo, the Trojan Horse). Gross Margin now stands at ~80%.

Interestingly, Palantir's Gross Profit is increasing substantially more than Operating Expenses.

Palantir is benefitting from a positive Operating Leverage.

In other words, Gross Profits are growing more than the costs needed to generate that growth.

By aggregating the costs under “Operating Expenses” we can see how Palantir’s cash machine is scaling despite the fact that they are investing heavily in foreign expansion in Europe and South Asia and in acquiring new customers, which account for substantial initial costs (Palantir Mistakes: a Matter of Survival).

Keeping track of these dynamics is crucial to truly assess if Palantir’s FCF machine keeps improving and advancing toward the “Long range target model.”

Palantir could achieve its ~85% Gross Margin target by:

• Increasing in size;

• Better managing their terms with cloud providers;

• Reduce the “consultancy” component.

The fact that ServiceNow already has an ~85% Gross Margin on its Subscription business shows that the target is achievable. Clearly, it is a matter of execution that needs to be monitored.

How does Palantir’s Gross Margin relate to those of its SaaS peers? Stay tuned.

“What I think is going to happen is we are going to have a couple years of terrible times, those companies that are most robust will survive and thrive, you'll get credit for it in a couple years”- Alex Karp, Palantir CEO.

Yours,
Arny

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In this article:

• Contracted Deal Value;

• Deals Closed;

• Government vs. Commercial Contracts;

• Leading Financial Indicators.

By breaking down the financial metrics we can obtain precious hints about the future direction of the business. This is particularly true for software companies.

The last quarter was not exciting for growth, but we can’t ignore the elephant in the room:

Palantir closed a record $1.3bn Deal Value in Q3.

This is a 76% increase compared with 21Q3, which underlines how lumpy the Government's contractual activity could be.

While Palantir Revenues are extremely resilient, the contractual activity is extremely volatile.

According to the management, ~$900mn of the $1.3bn Deal Value comes from the US Government. From our previous analysis (Palantir: It’s Raining), we know the majority relates to Defense, for instance, the $229mn Maven contract, and the HSI.

Since Palantir is in a pure “growth stage,” the expansion of the client base and the related acquired contracts are more important than the past quarterly Revenue number.

Only if the contractual activity remains strong will Revenue targets be achieved.

Deals composition

The $1.3bn Deal Value was generated through 273 contracts (+63% YoY).

The breakdown provided shows that most of the deals were small in size. This hints that the process of becoming more “mass market” with modularization and consuption based pricing (PLTR is Copying SNOW’s Pricing Model) is in play.

As a result of this contractual activity Palantir now has a $4bn Remaining Deal Value.

This represents a 14% increase against 21Q3 and 8% higher than the previous record achieved in 21Q4.

Does this mean we will see $4bn Revenues?

Contract Duration

Before going into the details, it is worth mentioning the length of the contracts.

As of 21Q1, Palantir’s contracts have an average duration of ~3.7 years.

The average contract duration is divided as follows:

• ~4.6 years for Commercial customers;

• ~3 years for Government customers.

Remaining Deal Value

The Remaining Deal Value represents the potential future Revenues from the active contracts.

However, not all Remaining Deal Value will be recognized as Revenues.

The $4.1bn Remaining Deal Value is composed of:

• $2.8bn Contractual Options = clients have the option to activate their contract, but no obligations;

• $1.3bn Remaining Performance Obligations = future Revenues under contract.

Contractual options: pay me maybe

From the S-1 filing, we know that most parts of the contractual options come from the Government segment.

This is due to the Blanket Purchase Agreements (“BPA”) which gives clients the optionality to execute 1-year “actions” over the length of the contract. According to the 10k, “U.S. federal government is prohibited from exercising contract options more than one year in advance.”

BPAs are established to cover recurring needs, purchases are also more likely to be in bulk and are backed by finite budgets.

Historically, ~56% of the Contracted Government Deal Value becomes Executed.

Therefore, we could expect ~$1.5bn Options out of the $2.8bn should be executed over the next 3 years.

This already gives a baseline of ~$500mn in Revenues per year.

IDIQ: the hidden value

The reported Remaining Deal Value does not include an additional big component affecting future Revenues called indefinite delivery, indefinite quantity contracts “IDIQ.”

As of Q4, $2.8bn IDIQ contracts are not included in the the Remaining Deal Value.

Therefore, there is this additional layer of potential future Revenues. IDIQ relates to contracts that have been awarded but have not received funding yet.

Differently from BPAs, which focus on budgets, IDIQs focus on the term of the contract: during a fixed period of time the contractor is responsible for an unlimited number of separate projects or additional work on a current project. The pricing is not fixed as it can be scaled up or down according to budgets.

These contracts are common in Defense; therefore, they have a high incidence on Palantir’s Revenues.

Remaining Performance Obligations: you will pay

Remaining Performance Obligations represent contracted future Revenues; therefore, they have an almost certain degree of recognition.

Revenue recognition occurs as Palantir delivers its software over the length of the contract.

As of Q3, Palantir has $1.3bn in Remaining Performance Obligations. This means that ~$1.3bn are contractually “sure” to be recognized as Revenues over the length of the contracts.

From the 10k, we know RPO is primarily referred to the Commercial business and does not include contracts with less than 12 months termination. This excludes most government contracts and consultancy projects, which are “on-demand” and don’t generate RPOs (Palantir: the QoQ Decline).

Therefore, we can consider RPO is the proxy of the future Commercial Revenues subscriptions.

“As a reminder, RPO is primarily comprised of our commercial business as it does not take into account contracts with initial term of less than 12 months and contractual obligations that fall beyond termination for convenience clauses, both of which are common in our government business.” - Palantir 10k

As a leading indicator, the assessment of RPO is crucial to understand the direction of future Revenues.

RPO growth is the prerequisite to future Commercial Revenue growth.

Specifically, the Current RPO provides the best indication of the Revenues coming in the next 12 months.

Current RPO: you will pay me soon

Current RPO (CRPO) is the subset of RPO that is going to be recognized as Revenues in 12 months.

Since RPO is mainly Commercial, CPRO by definition is also related to Commercial.

~$600mn Current RPO means that in the next 12 months, Palantir is entitled contractually to generate at least ~$600mn Revenues from the Commercial side.

As of 22Q3, the Current RPO represents 2.8x quarterly Commercial Revenues. This can be compared to 19Q4, which had the Current RPO at 1.2x quarterly Commercial Revenues.

The growth of this metric is absolutely crucial because it offers “visibility” into the future, which analysts and investors highly value in their assessment. Substantial growth in CRPO means that Revenues from Commercial subscriptions are set to increase in the coming quarters.

A strong trend in CRPO is a leading indicator for future Revenue growth.

This is the most precious hint we can get from the financials.

Investment banking analysts struggle to appreciate Palantir as a software company due to the “limited visibility” of Revenues. However, substantial growth in CPRO is set to change that assessment.

Rather than forecasting precise Revenues for the near future, the most important thing is to assess these crucial metrics keep going in the right direction.

Comparison with Commercial Peers

Palantir’s 2.8x CRPO/Comm. Revenue is similar to its peers:

• ServiceNow: ~3,3x

• Salesforce: ~2.7x;

• Snowflake: ~3.1x;

The financial metrics confirm Palantir is becoming a pure software business.

What our crystal ball sees

Summing up, we currently have this visibility for the next twelve months Revenues:

• ~$600mn from the recognition of CRPO. This could be considered “secured;”

• ~$500mn estimated Revenues from the execution of contract options.

This leads us to already see $1.1bn in Revenues in the next twelve months ($2.3bn expected in ‘23). This should be considered the baseline. On top of this, further Revenue generation should come from:

• IDIQ contracts;

• new contracts;

• consultancy projects.

The more Palantir becomes a “pure software company” and the higher the incidence of Commercial Revenues, the higher the visibility we will obtain.

Conclusion

With this initial analysis, we showed that Palantir’s contractual activity is strong and sets the basis needed to support the growth ahead.

By breaking down the Remaining Deal Value we can obtain precious hints about the future direction of the business. In particular, on the Commercial side, Current Remaining Performance Obligations are leading indicators of future subscription Revenues and the resulting “visibility in the future” could be more appreciated by analysts going forward.

Strength in Remaining Deal Value, especially in the CRPO, will lead to future growth.

Therefore, to properly assess whether Palantir will be able to reach the ~30% guided CAGR we will need to keep assessing them and gradually fine-tune our expectations.

When do you capture that in the form of revenue? That's a legitimate question to which we have no answer. But we will capture them because the contracts have been concluded and because we are sitting on the most important missions in the world. And those missions are going to end up being fully funded. - Alex Karp, Palantir CEO

Yours,
Arny

Join me on:
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View expresses are my own and do not represent Financial Advice in any way.
I own (many) PLTR stocks.

Editor:

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Palantir's stock price has been under pressure for many months and this creates discomfort for many investors. In this article, we will provide an articulated answer to the heavily discussed question:

Should Palantir spin-off its Commercial business?

Sharp edge for whatever time

Palantir’s structure is set to benefit from an operational standpoint from whatever happens in the world:

• Bad Times: the Government needs to keep spending or even increase spending to deal with sudden problems like hurricanes, pandemics and even wars.

• Good Times: the Commercial business could benefit from CEOs’ confidence in expanding their digital transformation journeys.

This integration between Commercial and Government is a core element of my investment thesis.

I would even say the idea of leveraging the tech developed in the Government sector to attack the Commercial side was brilliant and constitutes a factor that makes Palantir unique, as there is no other software company offering such integration, as shown by the lack of direct Palantir comparable company (Sum-Of-The-Parts Valuation). Actually, we have evidence that commercial companies like Servicenow, Microsoft and AWS are becoming more and more interested in working with the government.

However 27% of the people who answered my poll, support the view that the Commercial business should be split from the Government business.

Proponents of the spin-off idea suggest that a separation would:

• increase the focus of the management team to scale faster;

• improve Palantir’s public image by distancing from “spy,” and “controversial,” labels;

• unlock more shareholder value resulting in a higher stock price.

Is it really the case?

How a “split” could be performed?

Currently, Palantir’s Government and Commercial businesses operate under the same parent company “Palantir Technologies.” There is only one operating company selling both software to government and commercial clients. The split we see in the financials is to help investors assess the developments.

A split between Commercial and Government would mean performing a “spin-off” operation to “extract” the Commercial business from the Parent company.

This could be done in two ways:

• The Commercial business could exist as a subsidiary of the parent company. Subsidiaries operate under the direction of the parent company.

• Alternatively, the spun-off company could become a completely independent company, therefore free to pursue its own interests.

To better understand the potential benefits and disadvantages, we will focus on the more extreme case of a complete spin-off.

Splits are not “all roses”

Before assessing Palantir’s specific case, there are some considerations worth mentioning:

• Spin-offs are costly: they require substantial work from lawyers and investment bankers. One recent example is Kyndryl, which has been spun off by IBM. The related spin-off cost was $634mn against a valuation of ~$7bn market cap in the first day of trading. Now Kyndryl trades at a $2.5bn market cap, not really what I would call a “success.”

• Splits typically generate significant value when the spun-off company is already independent and financially stable. A relevant example of this is eBay spinning off PayPal in 2015. When eBay decided to spin off PayPal, the latter was already mostly independent with only 24% of transaction volume coming from eBay vs. 71%, 10 years before. In addition, PayPal was financially stable with a 16% Net Profit Margin.

  

• Spin-offs could be extremely risky for operations. The creation of a new brand can disorient customers and employees and create internal tensions when there are products sold by both entities. For instance, Palantir Apollo sits exactly in between Government and Commercial. How do decide which business unit should be in charge of it? In addition, to attract the best talents in the world, you need to offer them safety and brand recognition; a new brand could create serious difficulties in attracting new talents and retaining the existing ones.

If you invert a “split” you get a “merge”

From the technical standpoint of investment banking, a spin-off is an extraordinary operation called a “demerger.” As an “extraordinary operation,” for the company, it would make sense to pursue it only if the value at the end of the operation is higher than the value before the operation.

If the operation would destroy value, there is no reason to pursue the transaction.

As Charlie Munger often suggests, by inverting the problem, the situation could appear clearer.

“Invert, always invert” - Jacobi.

Therefore, if we invert, the split question would become:

“If Palantir Commercial and Government were separated, would it make sense for them to merge?”

If it would make sense to merge Commercial and Government, then splitting them would be a poor decision.

M&A case: Should Palantir Government buy Commercial?

Let’s assume Palantir Government and Commercial are two separate entities and we need to assess whether it would be convenient to merge them. We will value:

• Synergies: is the merged company better?

• Price: is the operation financially worth it?

• Culture: is there a common goal?

1 + 1 = 3

We can think of synergies as those operating factors that unlock value so that the merged company is operationally more valuable than the two companies working as standalone entities.

Synergies make 1 + 1 = 3.

Synergies are mainly related to:

• Revenues: can I sell more? This mainly comes from cross-selling products.

• Costs: can I cut overlaps? This mainly refers to G&A and R&D.

Revenue Synergies

Significant Revenues synergies could be unlocked by merging Palantir Government and Palantir Commercial. For instance:

• Government could sell Foundry to Government Agencies to help optimise their workflows and save costs.

• The closeness with Government agencies could help Commercial reach companies in the defence sector.

• The innovation developed for the Government, especially in Defence, could be adapted to help improve the business of Commercial companies and vice-versa.

For context, these are already true deployment cases:

• Foundry is being used by the Department of Health and Human Services (HHS) as the software backbone of its operations;

• Lockheed Martin, Prime Defence Contractor, is a “Commercial Client” soon to empower its Aegis combat system with Apollo, which can manage even “Top secret” workflows thanks to its DoD IL-6 clearance authorization.

• Sonnedix uses Meta Constellation, the software deployed in war to localize enemies through satellites, to identify misaligned solar trackers in need of repair.

Splitting the two businesses would disrupt the synergies already in play.

In the short term, a potential split could increase the aggressiveness of the go-to-market strategy of the Commercial side, which currently seems cautious about spreading mass-scale products. However, that would come at the cost of destroying the network effects deriving from the integration, which are crucial for Palantir to scale.

Cost synergies

A merger between Government and Commercial would allow generating economies of scale by:

• Optimizing General & Administration expenses (HR, Accounting) since the two companies operate in the same geographies.

• Easily share R&D: the technology developed for Government can empower Commercial customers and vice versa.

  

• Providing financial support: while the Government business already has a substantial Contribution Margin, the Commercial side is not financially strong enough to operate as a standalone business yet.

Price: would it be a good moment?

The Commercial business valuation is mainly determined by the cloud sector multiple, which now stands at a multi-year low.

Therefore, if the businesses were separated this would be a good moment to pursue an acquisition of the Commercial side.

On the other hand, splitting the Commercial business as a standalone company would receive a low valuation given the relatively low interest in the sector.

This would damage shareholder value.

Culture: is there a common goal?

In terms of corporate culture we observe:

• Palantir Commercial seeks to become the Op. System of the Modern Enterprise.

• Palantir Government seeks to become the Op. System of Modern Governments.

Both goals could be achieved by helping clients increase their efficiency with platforms that help them perform data-informed decisions.

Both companies are driven by the purpose of seeking technological superiority to make the world safer and more efficient. Peter Thiel would say they both seek to make their clients go from “Zero to One.”

The culture of Government and Commercial match perfectly and would integrate well under the same hood.

Merger verdict

We briefly demonstrated that Government would be better off merging with Commercial: there are substantial synergies to be unlocked and the current market valuations make Commercial an attractive target.

The soundness of this conclusion automatically invalidates the spin-off idea.

While in the short term, there could be some benefits in the stock price from having Palantir as a pure Defence/Government company, that would destroy value for shareholders in the long term as that would break network effects.

“We are going to thrive as this hybrid company that is both bull and baron, comes into full stride in both environments, but in absolutely anomalous stride when times are rough and people are hiding.” - Alex Karp, Palantir CEO, 22Q1 Earnings Call

Yours,
Arny

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Skywise is the most important commercial project Palantir has worked on. Understanding how Skywise works is crucial to understand how Palantir can generate further growth from it and from the various platforms currently being developed with other partners (Palantir Platforms Unleash Network Effects).

Skywise is the open platform developed with Airbus seeking to become the operating system for aviation. Born in 2017, Skywise connects:

• +140 airlines;

• +10.000 aircraft;

• +26.900 users using the platform.

These few numbers show that Skywise is a success, which naturally leads to the following question:

How much money does Palantir make from Skywise?

Palantir doesn’t give a precise answer, but with the information available to us, we can support a reasonable hypothesis. Over time, as new information becomes available, we can test this hypothesis and eventually adjust it as necessary.

Additional Skywise licenses will benefit Palantir

Many people, including myself, until recently, thought that Skywise was just the extension of Palantir Foundry which Airbus seeks to propose to airlines as an additional platform. This is incorrect.

Skywise is Foundry adapted to Airbus for its internal use and then is gradually opened up to Airbus customers and suppliers.

Currently, Skywise is being used by over 26,900 users, most of which, are Airbus employees. In fact, over 20.000 Airbus employees (15% out of ~130k) are on Skywise.

This information is crucial when contextualized.

If we apply a $3.6k/year per user, similar to Salesforce's highest Enterprise tier, on 26,900 users, we get ~$94mn, which is in line with the estimated revenues Palantir gets from Airbus being one of Palantir’s top 3 clients. This is a hint that Airbus pays for Palantir licenses that are used both internally and “sold” to its clients when they purchase a plane.

If Skywise becomes more widely used, Airbus will pay Palantir more.

Therefore, Palantir’s goal is to empower Airbus with the best technology and support, in order for Airbus to reach more clients and expand existing contracts.

In line with the assertions above, Skywsise is offered to airlines as follows:

• Skywise Core: free for airlines. This allows airlines to easily compare their fleet’s operating data against industry benchmarks. Airbus incorporates Skywise Core as an additional feature when it sells a plane, which is ~$100mn.

• Skywise Premium: this is monetized as a software subscription service and includes Health Monitoring, Predictive Maintenance, and Fleet Reliability.

  

Interestingly airline clients don’t necessarily need Skywise Core to implement Premium.

Given the structure above, the Revenues generated by Skywise belong to Airbus. However, there is the possibility that Palantir takes a % from the subscription sales as a form of Revenue Share agreement. As Skywise becomes more important for Airbus I expect them to provide more disclosure on the terms.

Shortcut to dominate niche

The partnership between Airbus and Palantir is comparable to the notable example of Veeva - Salesforce. Veeva is an American SaaS company focused on pharmaceutical and life sciences industry applications, whose flagship CRM product is built on top of Salesforce.

Salesforce is the backbone of Veeva CRM product, but Veeva tailored it to the specific needs of the healthcare industry.

In order to benefit from Salesforce’s infrastructure, Veeva pays Salesforce a “royalty” of $40-50mn per year, annually.

This agreement allows Veeva to dramatically cut development time and costs. By being focused only on serving healthcare needs, Veeva reached an astonishing 80% market share.

For Salesforce this is extremely beneficial because it is a way for them to penetrate a specific market, indirectly and generate a perpetual stream of high-margin revenues. Given this structure, Veeva can’t detach easily; Salesforce Revenues from Veeva are extremely sticky.

We showed that most Skywise users are Airbus employees and that, despite this not being official, the implied Revenues suggest that Airbus pays Palantir based on the number of licenses. Therefore the relationship between Skywise and Palantir seems comparable to the one between Veeva and Salesforce.

Skywise has been deployed by over 140 airlines in just ~6 years. To contextualize this number, consider that Amadeus has 210 airlines contracted for its Airline IT Solutions. Amadeus, one of the biggest IT European companies, is considered the monopoly of the aviation sector.

Before the pandemic, Amadeus had an EBITDA margin of ~40%, this is a hint of how a successful business in IT for Airlines can generate cash.

Skywise will open the doors to more Palantir Developments

In 2020 Skywise introduced its App Store which now offers 19 applications. These applications are built both by Airbus (as of NAVBLUE) and by external parties like Palantir and FPT.

FPT is Palantir’s partner to sell Foundry in South Asia. This is a clear sign of emerging network effects which I previously discussed in depth (Palantir: The Biggest Networks Start Small).

This structure is crucial: we will likely see a similar development from the other vertical platforms. Palantir can have some tailored solutions developed on the App Store, but its strength is in creating a platform that facilitates the building and implementation of other solutions.

Airbus seeks to reach $10bn in Services Sales in the next decade. Skywise Revenue is the driver to reach this goal.

“Preparing the future of Airbus Services, at the Farnborough 2018 Air Show Airbus Presented its route to $10bn Revenues in the next decade.” - Airbus

Skywise Core [X]: different monetization layers

Skywise just released its next step in its monetization strategy: various subscription tier offerings to fit the different digital needs of airlines.

The new program is called Skywise Core [X] and consists of the layers of subscription:

• X1 “navigate data”: data becomes visible and accessible also to non-IT users. This tier focuses on improving airlines’ data visibility by helping create dashboards and reports. Skywise Apps are available on demand.

• X2 “navigate operations”: data becomes actionable between divisions and functions. This tier allows clients to download all the Skywise apps, develop custom applications quickly with low/no code, and create a digital twin of airlines’ operations to explore business hypotheses and scenarios.

• X3 “navigate the uncharted”: make data proactive and discover things. This tier allows the exploitation of the full potential of digital twins with the support of AI/ML for predictive operating models.

As you can see, this offering perfectly matches the value proposition of Palantir Foundry.

This supports the idea that with Skywise, Airbus is implicitly a Palantir seller.

Conclusion

If Airbus successfully expands Skywise to its network, Palantir would benefit as more licenses are purchased and some additional revenues come from the apps directly created.

The more applications are built and the broader it becomes, the stickier it becomes and for Palantir, those will become “perpetual revenues.”

Skywise being the most advanced data platform offers the best picture of what we can see also from the other open platforms which Palantir is developing.

Yours,
Arny

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Palantir was born as a Defense Contractor and is becoming the Army’s Operating System. Therefore, as shown before, its business is set to benefit enormously from the increase in geopolitical tensions (PLTR Government: It’s Now or Never).

A war officially started at the end of February when Putin attacked Ukraine. This has been contributing positively to the Defense contractors’ stock price. Palantir, on the other hand, is still more than 20% down from that moment.

Why is that?

We must understand how the stock is considered by financial professionals in order to spot asymmetries and fine-tune expectations.

Palantir is ignored

Typically, when geopolitical risks rise, due to the increasing possibility of war, Defense stocks increase in value as the markets anticipate stronger demand for their solutions.

Despite being on the route of becoming the “first Prime Software Defense Contractor,” Palantir stock doesn’t behave as a typical “Defense stock.” We saw it at the beginning of the conflict and more recently as potential tensions arise from Xi Jinping officially gathering more power, becoming de facto “emperor of China.”

Reaction: Defense stocks up, Palantir flat…

Palantir is not understood

Below you can see the list of the 13 Sell-Side Equity Analysts covering Palantir (according to Palantir’s website) and their sector expertise:

The only Equity Research Desk covering Palantir as a Defense Contractor is Bank of America.

Interestingly, Bank of America has a Target Price of $13 per share, well above the $11 average, analyst Target Price.

The other investment banks cover Palantir with the Tech/Software Desk and its analysts have no previous experience in the Defense sector (I checked their LinkedIn profiles).

Analysts in Investment Banking tend to be siloed, and once analysts develop expertise in a certain sector they rarely move. This gives them depth on standard companies, operating in the sectors, however, limits their assignments when outliers appear.

Palantir is unique because its business:

• Operates in the Defense sector while exhibiting a superior business model compared to legacy Defense Contractors (Cloud+Defense=Palantir);

• Has better unit economics than the major B2B Cloud companies (Seeking the Alpha: PLTR vs NOW).

Palantir is an outlier, therefore difficult to evaluate.

Bank of America: Data is the new bullet

We can note how Bank of America appreciates Palantir’s government business from the interview below:

The most important take from the interview is the analyst’s assertion that the revaluation of Defense has not been reflected in Palantir’s price. In particular, he said:

“Data is the new bullet... Palantir offers a great way of being exposed to the increase in National Security Spending. That has not already been reflected.”

Other takes worth mentioning from the interview:

• “The increase in Defense budgets, growing from $850bn budgets this year to $1trn in 2026 is clearly a long-term driver for Palantir;”

• “Palantir Operating System lives inside many other systems built by other companies we cover;”

• “Most analysts that are covering Palantir today aren’t looking at that. They are not giving them full credit for what’s going on in National Security;”

• “Another way to look at it is: they are pricing in Defense, but they are not giving credit for Commercial.”

These assertions are in line with what we discussed in the previous article (Palantir Analysts are wrong):

Analysts give credit only to one of the two business segments.

This creates an asymmetry.

Differently from analysts of the other investment banks, Bank of America’s Ronald Epstein is deeply knowledgeable on the Defense space. In addition, being a PhD in Engineering, Epstein appreciates how difficult it is to build a solution like Palantir.

Palantir is excluded

Technically speaking, Palantir doesn’t move like a Defense company because it is not included in the key Defense indexes and funds.

Defense ETFs generally include Aerospace companies due to their intertwined nature. For instance, we will consider the two following ETFs:

• XAR - SPDR S&P Aerospace & Defense;

• ITA - Ishares US Aerospace & Defense.

Palantir is not included in either of these two Defense ETFs.

The main constituents of these ETFs are:

• Raytheon - Mainly Defense Contractor;

• Lockheed Martin - Pure Defense Contractor;

• Northrop Grumman - Pure Defense Contractor;

• Curtiss Wright - Aerospace Defense company with ~34% of Revenues coming from the Commercial Sector;

• Boeing - Mainly Commercial Aerospace company with ~34% of its Revenues coming from Defense.

By looking at the smallest components of such ETFs we can assess whether Palantir’s exclusion is a matter of Market Cap size:

• V2x (~$1bn);

• Archer Aviation (~$0.7bn);

• National Presto (~$0.5bn);

• Ducommun (~$0.5bn);

• Smith & Wesson (~$0.5bn).

Since Palantir Market Cap is over $15bn, the exclusion from the Defense ETFs is clearly not due to limited size.

Palantir’s exclusion is probably due to its unique hybrid structure where Commercial is going to take a large component of the Revenues. However, in the current state Palantir’s business is still heavily driven by the DoD, as it accounts for ~35% of the Revenues.

Palantir could be appreciated as a Defense Contractor only when it will show the ability to transform geopolitical chaos into Revenues.

Despite the recent heavy contract rain and the declared contribution to the Ukraine-Russia conflict, Palantir still doesn’t show growth in the numbers from these occurrences.

The asymmetry

In essence, Palantir is both:

• a highly profitable defense contractor: the Contribution Margin for its oldest clients (like Army) is ~89%, as reported in the S-1 filing;

• an unprofitable (on a GAAP basis), growth, B2B software company;

Its stock price should theoretically reflect a mix of the two. However, it is labelled by financial professionals as an “unprofitable growth tech” stock.

Therefore, Palantir's stock price moves in line with the major “unprofitable growth tech” indexes and funds, like Cathie Wood’s ARK ETF.

An asymmetry between the business’ actual qualities and the financial labels, create opportunities.

The opportunity

When the financial sector struggles to attribute a label to a company, it is likely that the company is unique and probably offers the best mix of numerous labels.

Two great examples come to my mind:

• Ferrari: at the IPO, analysts were confused if Ferrari should be considered an “Automotive” company or a “Luxury” company. The reality is that Ferrari has characteristics from both and is superior to Automotive peers and the average Luxury brand. Due to the uncertainty of the label, Ferrari was trading at 11x EV/EBITDA after the IPO. It has now proven that its business model is unique, backed by strong financial results, and it trades at a rich 20x EV/EBITDA (similar to the 24x of Hermes). As G. Tamburi, my favorite Italian investor said, “Ferrari is neither Automotive nor Luxury. Ferrari is a myth.”

  

• Tesla: many analysts still struggle to accept the fact that Tesla is obviously a Tech company selling cars. The topic becomes more complicated as Tesla is expanding into Solar Panels, Batteries, FSD, and Robots. Tesla is clearly not just an “Auto” company, despite ~87% of the Revenues coming from car sales. Its premium 27x EV/EBITDA reflects this. Tesla is an emerging ecosystem.

Palantir, in a similar way, is a unique hybrid that offers the combination of:

• Resiliency in chaos as a defense contractor;

• Scalability of an Enterprise Software company with strong network effects (PLTR: the Biggest Networks Start Small);

• Exposure to exponential growth from the AI deployment in both the Government and Commercial sectors.

Therefore, any traditional label that restricts Palantir to just a “Defense” or “B2B SaaS” company, is short-sighted.

Conclusion

In the short term, prices are mainly driven by the interest in a certain sector.

Sector labels determine the price direction in the short term. In the long term, the market rewards companies for their ability to generate Free Cash Flow.

Until Palantir can provide striking evidence that it can transform war tensions into Revenue growth, it is set to continue trading as an unprofitable, growth company, similar to those populating Cathie Wood’s ARK ETF.

The recent contract rain (Palantir: it’s Raining), combined with the recent IL6 award, provide clues that the Palantir Government is still at the beginning with evidence of a future re-acceleration of the government business (PLTR Q3: What I am looking for).

A potential inclusion in the Defense ETFs could help Palantir stock move in line with other Defense Contractors when geopolitical tensions escalate.

Being associated with ARK companies was a curse for the PLTR stock price. Now, the “curse” has created an asymmetric opportunity.

“In the short run, the market is like a voting machine. But, in the long run, the market is like a weighing machine.” - Ben Graham, The Intelligent Investor author

Yours,
Arny

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The freemium Trojan Horse

Palantir has often been criticized for not having a “freemium” product, which would facilitate sales towards IT departments.

However, the freemium solution is already in front of us!

The recent update of the website shows Apollo as the “freemium” product we have been waiting for. It also fills the consumption-based pricing gap (PLTR copies SNOW’s Pricing Model).

Apollo has been officially commercialized since April, but the website is now reporting its pricing:

• Apollo SDK = Free;

• Apollo Core = $100/installation per month. One installation is an instance (update) of a service installed in one environment. As an example, if a company wants to install the same update into 3 environments (AWS, Azure, on-premise) Apollo would charge $300.

Therefore the key drivers of Apollo’s monetization are:

• the exponential growth in potential updates that clients can deploy: by becoming more efficient in developing and deploying instances, more updates can be sent;

• the increasing number of environments a client needs to operate into as regulation encourages companies to “diversify” the operating risks.

Apollo could revolutionize the course of Palantir’s growth in the long run. To appreciate its strength, we should take one step back and uncover what Apollo is.

Apollo: the brain behind Foundry and Gotham

Software drives enterprise success to a point where we can almost say that “all companies are software companies.”

Software is no longer a nice accessory for companies.

However, creating software is difficult. Delivering and managing software at scale in an efficient manner, the so-called “software supply chain,” is even more difficult, yet existential.

Apollo helps companies manage their software supply chain.

When Palantir was born, the Cloud sector was still in its infancy. Its government clients were only running Gotham “on-premise,” on their own servers. This meant manual installations and updates. Therefore, software deployment was slow and very “labor intensive”. This was a major reason why Palantir’s contribution margins were initially low (PLTR: This Time It’s Different).

Apollo was built initially to help Palantir build and maintain its Foundry platform towards a Cloud SaaS offering. Now Apollo is the brain that helps Palantir deliver Foundry and Gotham updates in all the environments, from the public clouds; AWS, Azure, Google Cloud, to the back of Humvees (military Jeeps) or even satellites.

Apollo currently supports the deployment on +300 unique environments.

In particular, Apollo allows to:

• Delete Environment constraints: Apollo helps diversify between Cloud providers, operate in heavily regulated environments and even software to the edge, like satellites (PLTR’s $140bn to Monopolize Space). With Apollo, developers can write code once that works for each environment. Given the pricing structure, where Palantir charges for each installation in each environment, Palantir is set to benefit enormously from the Multicloud and Hybrid Cloud (cloud + on-premise) adoption.

• Perform Continuous Delivery: updates are sent regularly without service interruption. This way, the service is up 24/7.

• Monitor code infrastructure from a single pane of glass: Apollo helps users understand the current health of the code infrastructure. New features can easily deploy in a safe way and react to anomalies in a timely manner. This is crucial to monitor security and compliance with regulations, like the GDPR data protection law in Europe.

These features translate into strong benefits. According to Palantir’s website:

“Apollo can help speed up the release of products by over 25X and cut DevSecOps costs by 50%. As a result, developers can focus on what they do best: building great software.”

Since using Apollo, Palantir has benefitted from:

• 45x better deployment frequency on Foundry and Gotham: from 8,000 deploys per month to 360,000+ deploys per month;

• 12,500x improvement in lead time: the time to see changes effectively deployed moved from 1 month to 3.5 minutes;

• 4.9 minutes to Restore Palantir (“rollback”) on a previous version automatically and safely. This task used to take numerous hours;

• 95.5% success rate in Change in Failure Rate: Apollo ensures that changes to production are deployed only after passing rigorous tests, including success criteria defined by developers, operators, and security teams, as well as code testing (canary testing and blue/green rollouts).

By commercializing this solution, Palantir aims to provide its clients the same efficiency in building and delivering software it has.

Apollo is AWS 2.0

Palantir compares Apollo to AWS because it was born internally by Amazon to solve Amazon’s problem to have a stable infrastructure on Prime days when the traffic volume spikes and the infrastructure needed to be elastic to manage it. Since then AWS has become the key profit driver for Amazon.

Apollo was born for Palantir’s need of being efficient in distributing its software to the most fragmented environments.

AWS pioneered the Cloud industry. In the same way, Apollo seeks to bring the cloud to a new dimension called “Cloud 2.0”, which involves Edge, MultiCloud, Multi-Layered Security and Privacy.

Palantir’s Trojan Horse

As mentioned, Apollo’s offering is composed of two major modules:

• Apollo Software Development Kit (SDK): the free version;

• Apollo Core: the consumption-based product.

In detail, Apollo SDK helps:

• Reduce time to market of deployment;

• Decrease the cost of DevOps, meaning fewer engineers are needed to generate the same output;

• Scale code with Apollo CD (inside the Apollo Core paid module) with a “touch of a button.”

Essentially, Apollo SDK is the programming environment that helps developers write code. To keep implementing updates in a continuous way, clients can switch to the paid features.

By using Apollo SDK engineers can only focus on building code that adds value. Therefore, engineers don’t need to become experts on:

• infrastructure;

• security;

• compliance.

This translates into huge efficiency gains for developers.

Apollo Core

This is the key offering which consists of 3 components:

• Dependency Management Engine: helps define how software should be deployed, under which environment, constraints and security levels;

• Apollo Continuous Deployment (“CD”): this is the core “orchestration engine” that allows the continuous deployment of new features with different rollout strategies (eg. canary environments), and rollback to a previous version in the case where instability emerges. Meanwhile, Apollo ensures that the full audit of the release is available so that it can ensure the constraints set by the security and compliance teams are respected.

• Day 2 Operations: ensure the quality of the software and check vulnerabilities. With Apollo, all teams understand what software is running, where, and whether it is healthy, secure and available. Apollo ensures platforms stay up-to-date and operational 24/7.

This product is the “Nirvana for IT.”

Developers are frustrated from spending time on infrastructure code rather than valuable code. The resulting burden contributes to delivering solutions that don’t work, as ~80% of the internal software solutions fail to deliver the expected results.

Below you could find Codestrap’s interview with Greg DeArment, Apollo's Chief Architect.

Currently IT departments are the biggest competitors for Palantir Foundry. For years they tried to develop internal solutions which turned into “Frankenstein monsters” that often don’t work. Therefore, if Palantir can solve the pain of IT departments with Apollo, they would also be more prone to adopt Foundry.

This would also facilitate the building of a developer community, which is essential to reach mass and growth in the likes of Snowflake and Salesforce.

Who uses Apollo?

Apollo is currently deployed by its biggest customers, like Airbus, BP and the US Army.

Apollo does not only empower established organizations. A recent whitepaper published in August highlights that Apollo is also ready to be commercialized to the Builders. Builders currently represent ~20 early-stage startups built by former Palantir employees that have been chosen for Foundry for Builders.

In addition, Sarcos, one of the SPACs Palantir invested in (Are PLTR’s SPACs a Scam?), uses Apollo to manage its robot fleet on a scale and distribute updates on it instantly.

Apollo’s potential Total Addressable Market is simply immense.

Apollo is ready to be deployed to any company or government organization that needs to write code regardless of its size.

Conclusion

The commercialization of Apollo is one of the most important Palantir milestones.

Unfortunately, due to the complexity of the product and its target of IT professionals, it has been underrated. I don’t expect Wall Street to appreciate it until it delivers a clear contribution to Palantir’s numbers.

Apollo is set to be the key enabler in acquiring new customers thanks to its freemium model and being appreciated by IT departments.

This would create network effects within a company (PLTR: The Biggest Networks Start Small) and help Foundry be adopted across the enterprise. Thanks to its security controls, Apollo has been a key driver of the recent IL6 accreditation.

This is only a hint of the importance that providing a secure and effective software supply chain will have in the coming years as regulation will become stricter. This would inevitably increase the need for solutions like Apollo.

It is unlikely Palantir provides full numbers on Apollo until it would become a key driver of growth. For reference, Amazon started disclosing AWS numbers only in 2015 when it reached ~$5bn in Revenues.

Since Apollo relates to software deployment, which is an existential problem affecting any modern organization, its potential is “essentially unlimited.”

“While most companies are content with addressing the idiosyncratic needs and inefficiencies of select customers in a subset of industries, the market we seek to address, particularly among the world’s commercial enterprises, is essentially unlimited.” - Alex Karp, Palantir CEO

Yours,
Arny

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View expresses are my own and do not represent Financial Advice in any way.
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Some situations are special and present a unique opportunity.

When your offering perfectly matches the demand, you have a rare chance, which as a business you can’t fail in capturing.

I believe this is the case for Palantir’s Government business.

War is bad, but not for all

Currently, the geopolitical scenario is under pressure:

• Russia is escalating its “special mission” on Ukraine;

• China is increasing pressure on Taiwan.

However, from the standpoint of a Defense Contractor, that is all but bad news.

Almost 80% of the US Palantir’s Government business, which represents ~75% of the total Government Revenues, comes from the Department of Defense.

Palantir’s Government business is essentially “military software as a service”.

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Transforming disaster into Revenues

Palantir empowers soldiers in making data-informed decisions.

There is no better way for a Defense contractor to show the validity of its offering than in real scenarios.

It is premature to have precise numbers of how much the Government business could keep growing, but I am confident that it should return to its ~30-/35% CAGR if the TITAN contract is achieved and Palantir is able to capture the coming increase in defense spending from the US and NATO countries.

A positive sign comes from the increase in Government clients as of Q2.

In 22Q2 Palantir gained 8 new Government clients breaking the stagnant trend.

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I expect to see further development in Q3.

As shown in the previous article (PLTR Gov. Slowdown: Not PLTR’s Fault Only), DoD and NATO are increasing their defense budgets substantially in the coming years.

In theory, countries should invest high enough in defense to prevent any attack. But in reality, we see the increase in spending as a result of increased tensions.

You could clearly see how military expenditure increased in all regions after 9/11 in 2001.

The increase in military spending translated into a substantial increase in Revenues for the prime contractors.

For instance, Lockheed Martin’s Revenues doubled from ~$25bn in 2001 to almost $50bn in 2012.

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A wildfire triggers an increase in spending now and for the coming years to keep the situation monitored.

The increase in spending on defense as a result of war and geopolitical tensions automatically expands Palantir’s Total Addressable Market (“TAM”). At the time of the Direct Listing in late 2020, the S-1 filing indicated that Palantir’s Government TAM was ~$63bn, of which $26bn from the US.

Palantir in Ukraine

We know Palantir is playing a crucial role in the Ukraine-Russia war.

Palantir, for instance, has been used to help manage Ukrainian refugees:

Palantir’s Metaconstellation is used to receive precious almost real-time information from satellites, for instance, to track Russian tanks and artilleries.

The involvement of Palantir has become official when Karp visited Zelensky, Ukraine's President. Karp was the first CEO to visit Zelensky in person.

@KrisPatel99 found evidence supporting the fact Ukraine is actively using Palantir, in particular, by the Head of the National Security Council.

Neighbors need to pay attention

Aggression in a country automatically triggers the alarm of its neighbors. However, geopolitical tensions don’t only involve a narrow area.

Once a wildfire happens, the nearby area should also be closely monitored.

We have hints from Karp meeting the Lithuanian President.

On the Taiwan side, China’s potential aggression put pressure on Japan, Australia, and South Korea to increase defense spending to monitor the situation and be ready.

In this regard, Karp met Japan’s former Prime Minister Shinzo Abe, who had a strong position against China invading Taiwan. Unfortunately, Shinzo Abe has been dramatically assassinated a month later while giving a speech.

How can Palantir effectively help?

This video is worth more than 1.000 words:

Price follows fundamentals

As an emerging Defense contractor, Palantir has an incredible opportunity to prove that its solution can help save lives and win a conflict. This should reinforce the existing relationships with the Department of Defense and set the basis to collect further contracts in the coming years.

This does not mean that the stock price can’t drop further. In the short term, the market is moved by emotions and narratives, which are both very negative right now. However, if Palantir captures the window and performs well in terms of the underlying business, the stock price will follow.

In the coming quarters, we will properly judge if the “Government Slowdown” narrative is real or just the beginning of a new cycle.

Yours,
Arny

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View expresses are my own. Do not represent Financial Advice.  

I own (many) stocks.

In the previous article, we saw that SPACs could play a crucial role in bootstrapping growth to facilitate reaching critical mass for Palantir (PLTR’s SPACs Crucial Role in The Network).

The financial value of the SPAC stocks has been decimated. Fortunately, these SPACs pay Palantir for using Foundry.

Are SPACs a scam or an opportunity?

In this article, we will assess the operating impact of SPACs on Palantir’s numbers.

Are SPACs relevant?

From a pure investment standpoint, SPACs are a disaster with over 80% loss in the value of these stocks.

From a network perspective (PLTR: the Biggest Network Start Small), SPACs could have a strategic role in helping Foundry reach critical mass for clients that could unleash network effects.

Palantir has invested in 20 SPACs. These now represent ~9% of the 203 Commercial clients.

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SPACs Revenues increased accordingly and now stand at ~$30/40mn per quarter. This represents ~18% of Palantir’s Commercial Revenues or ~8% of Total Group Revenues.

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An alarming sign?

By separating the SPAC Revenues, we notice the remaining Commercial Revenues declined -by 2% QoQ by $3mn (+21% YoY).

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This is the first time the Commercial Revenues haven’t improved QoQ.

The slight decline could be the result of the gradual passage to consumption-based contracts, which are slower to ramp up initially, or possibly due to unfortunate contract timing. This crucial component must be monitored in Q3, in order to assess if this is a temporary occurrence or if there could be a major underlying problem in the Commercial business.

SPACs pay… a lot!

Each SPAC generates an average of ~$7mn per year, detailed here :

• $6mn in 21q2;

• $7.6mn in 21q3;

• $8.1mn in 21q4;

• $6.6mn in 22q1;

• $7.8mn in 22q2.

These numbers are superior to the average Palantir Group Revenues of ~$6mn/y.

Avg. Revenues from SPACs are also superior to the average Revenues generated by ServiceNow’s clients, more than $1mn Revenues per year, generating on average ~$3.8mn (PLTR vs NOW: Seeking The Alpha).

SPACs avg. Revenues of ~$7mn/year compare with:

• $3.9mn/yr Average Revenues per Commercial client;

• $3.7mn Average Revenues per Commercial client ex SPAC.

SPACs on average, are paying more for Foundry than the aggregate Commercial clients.

The relatively high amount SPACs pay compared with their small business size could be due to their usage of complete Foundry access (“full stack”), meaning that Foundry is not used for specific tasks but is spread across the enterprise.

The remaining clients generate on average, lower Revenues, probably due to the combined effects of:

• modularization, which makes new clients “start small” before they expand (Revenues can grow as client purchases more modules);

• the steep increase in the number of clients, which “dilutes” the average as the denominator increases.

  

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SPACs Return on Investment

In total Palantir spent ~$400mn in SPACs and receives ~$30mn per quarter, which means 30% per year (~40% if we consider $39mn as of Q2). This is a great return from a cash standpoint because it is in line with the Venture Capital funds’ IRR (Internal Rate of Return) when they seek investments.

The payback period for its investment is ~3 years assuming these SPACs keep the spending at the current $120mn run-rate and they don’t go bankrupt.

Since some of them are likely to go bankrupt it is crucial that the successful ones more than compensate for the losses.

As a reminder, Palantir doesn’t collect 100% of these Revenues as a margin. ~20% of the revenues should go to cloud expenses (~80% gross margins) and I assume some marketing expenses are needed to follow the clients and help them scale.

The real payback period including the costs should be around ~4/5 years.

SPACs verdict

Is Palantir buying Revenues? Yes, but at a good price.

In essence, Palantir spent ~$400mn to generate ~$120mn Revenue/year. At the current rate, this consists of an appealing ~30% yearly Return, appropriate for a Venture Capital type of investment. Regardless of how SPACs perform in the market, Palantir receives Revenues from them unless they fail.

SPACs are also useful to reach the long-term strategical goal since they could accelerate the process of reaching the critical mass, crucial to unleashing network effects. In addition, SPACs could provide Palantir with the expertise needed to develop further solutions for smaller companies (Foundry for Builders).

We can consider SPACs as investments in “marketing expenses” to boost the network and approach smaller companies.

The analysis of the SPAC Revenues hints at some positive and negative attributes.

On the positive side:

• small companies like SPACs can generate substantial Revenues if they address Foundry as their operating system;

• the cash return on the SPACs investment is already quite high (~30% IRR). If some SPACs survive and scale they could become very profitable for Palantir.

• ~$400mn investment doesn’t impact Palantir's financial stability (~$2.4bn in cash while producing a steady FCF), but provides unlimited potential upside.

On the negative side:

• timing-wise SPAC investments were completely wrong as they bought SPACs at insane valuations. Fortunately, Palantir is paid -well- in the meantime.

• the relative strength of SPACs shows the avg. Revenues from remaining clients are still relatively low;

• by isolating SPACs Revenues from the Total Commercial Revenues we saw a $3mn decline QoQ that we must monitor in future quarters.

How are the Commercial clients excluding SPACs actually performing? I will investigate further in a future article.

Yours,
Arny

Join me on:
Twitter: @arny_trezzi
Youtube: @Arny Investing
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Business Email: arnylaorca@gmail.com
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View expresses are my own. Do not represent Financial Advice.  

I own (many) stocks.

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In the previous article (PLTR: The Biggest Networks Start Small), we shared Palantir could be seen as an early Enterprise Network looking to scale its size by being exposed to multiple clients.

Under this framework, the platforms like Skywise (developed by Palantir and its client Airbus), could be seen as an adjacent network facilitating Palantir in becoming exposed and capturing new clients.

By expanding and creating networks Palantir could reach more clients to boost their growth.

United Airlines is an example of a client of Skywise and a direct Palantir client:

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Palantir wrote a crucial sentence about the airlines using the Skywise platform:

“Each one is now an existing or potential customer” - Palantir S-1

Platforms will be crucial to empower network effects

We saw previously (PLTR SPACs Crucial Role in the Network) that SPACs could be seen as the bootstrap component to facilitate the network reaching critical mass.

Once critical mass, the so-called “tipping point”is reached, further growth should be sustained by “Finding Clusters” to solve common problems of a related group.

With platforms, Palantir is creating the basis needed to fully exploit the expected network effects from the critical mass.

Becoming the Operating System of any sector

Palantir has already developed 5 vertical platforms with its clients, each tackling a specific sector:

• Airlines = Skywise with Airbus;

• Semiconductors = Athinia with Merck;

• Cancer Research = Syntropy with Merck;

• EV Infrastructure = EV Operating System with Wejo;

• Insurance = Athena with Swiss Re;

• Commodities with Trafigura [not built yet];

• Heavy Industries with Hyundai Heavy [not built yet].

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We can think of these vertical Platforms having a similar function of a Facebook group: a network inside the bigger network.

Groups in a network show these characteristics:

• Groups are valuable as there is a common necessity/goal;

• The value of the group increases by increasing the number of users;

• Once most of the people of a niche are in that group, you can’t afford to stay out.

Platforms’ contribution to growth is still relatively contained given the relatively small size of the network and the time needed to develop and scale these platforms. As we are going to see with Skywise, the network can really expand after ~5y of developing the platform.

Platforms are the tools to become the Operating System of each sector thanks to network effects.

Skywise

Skywise, the operating system for the airline industry, seems to be the biggest platform network developed up to now on Foundry:

• +130 airlines;

• +15 suppliers;

• +17.000 users using the platform.

We can visually see the network effects taking place from this chart showing the user count on the Skywise platform.

Understanding the dynamics of Skywise helps us better understand why platforms can become a cornerstone of long-term growth.

The bigger the network (airlines, suppliers, users) the more:

• more data is produced;

• better operating decisions are performed.

More in detail, for the airlines these translate into:

• cost savings from less downtime;

• more safety from better preventive maintenance.

For instance, EasyJet and Skywise signed a five-year agreement after Skywise correctly predicted faults before they occurred, therefore avoiding 31 delays and/or cancellations. Thank you @jonescm128 for the source.

For Airbus this means:

• client stickiness because Skywise becomes crucial for operations;

• ability to improve future plane models and manufacturing by understanding more sensor data.

Every additional airline joining the network and user using the platform make the network more valuable for Airbus and Airlines.

For Palantir, this means entrenching and expanding its reach, therefore its growth.

Conclusion

Platforms, now still in early stages, could become the key driver of growth once the critical mass of clients is reached.

The more clients Palantir has, the easier is to reinforce existing networks by making them join existing platform networks or create new ones for common problems of a certain industry.

By expanding and creating networks Palantir could reach further clients to boost its growth.

With these platforms, Palantir could become the reference operating system in any industry, pursuing its goal of becoming the operating system for the modern enterprise.

“We are helping people manage parts and people together” - Shyam Sankar, PLTR COO

Yours,
Arny

Join me on:
Twitter: @arny_trezzi
Youtube: @Arny Investing
Instagram: @arnylaorca
Email: arnylaorca@gmail.com
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View expresses are my own. Do not represent Financial Advice.  

I own (many)

Some things that appear bad, could become relevant if seen from a different perspective.

In the previous article (PLTR: the Biggest Networks Start Small) we saw how Palantir could be seen as an Enterprise Network. This could help us better understand the rationale behind certain decisions like the ~20 SPACs, as highlighted previously (PLTR Q1 Outlook), which seem like very weak decisions from a business perspective.

As a Network, Palantir’s primary goal is to increase its members - nodes - until a critical mass is reached.

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The path to get there is not linear.

As shared, the biggest networks we know of had to execute “things that don’t scale” in order to facilitate the network's growth towards its critical mass when the product is still not good enough for mass adoption. (The Struggle full article)

To reach critical mass companies boostrap growth with non-scalable actions.

Notable examples shared by The Struggle are:

• Facebook accessed the entire Harvard directory early on, to provide immediate utility for early adoption;

• Airbnb founders literally went door to door in New York to recruit new users;

• Reddit created several accounts on its own and started submitting interesting content to make the site feel alive for new users.

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SPACs could be seen as the bootstrap component to reach critical mass

Palantir can’t systematically invest in SPACs to grow, but their contribution to the flywheel spin faster to stimulate further organic growth.

SPACs play a crucial role

Despite the disastrous investment results from the SPACs, ~70% losses, to date, they could play an important role in speeding up adoption as they are:

• covered by media;

• involved in events and networking;

• targeting multiple emerging and established sectors;

• connected to pools of talents and investors;

• exposed to problems which could generate archetypes for other Palantir clients.

It is worth spending ~$500mn for network effects? I will write a future article, dedicated to SPACs from a financial perspective.

Here I’ll share a couple of examples of the SPACs network effects.

Wejo

Wejo, one of the most known SPACs, is building an EV Operating system built on Foundry.

The ability to integrate with 3rd party data means that also Palantir clients could benefit from the partnership between Palantir and Wejo (@theKameroon dashboard):

• Retailers: 3M, Kimberly-Clark, Henkel, CVC, P&G, Wendy’s, Pepsico;

• Utility Companies: Edison, PG&E;

• Automakers: Stellantis (FCA, Pegeout), BWM, Ferrari, Faurecia, Honda, GM;

• Charging Stations: Tritium.

Another interesting component of the network effect comes from the relationship between Sompo, one of the biggest Japanese insurance groups and Wejo.

Sompo is directly involved in Wejo’s operations as a commercial partner and a member of Wejo’s Board of Directors.

Last month Sompo contributed directly to Wejo’s $ 15.9mn capital raise.

Palantir’s network provides resources for Wejo to keep scaling.

Blacksky

Another example of a Key strategic partnership comes from BlackSky, a satellite company that is using Foundry as its operating system.

The ability to integrate Blacksky’s localization models with Palantir makes Metaconstellation more valuable.

Blacksky has been recently awarded a $1bn Electro-Optical Commercial Layer Contract from the National Reconnaissance Office to support the Commercial development of space.

As we mentioned previously (PLTR’s $140bn Opportunity to Monopolize Space), RioTinto and BP, both relevant Palantir clients, are already integrating space information into their operations.

With the development of the infrastructure, other Palantir Commercial clients should become more interested in the space economy.

In addition, the recent partnership between BlackSky and Esri, an international supplier of geographic information system (GIS) software, indirectly exposes Palantir to 350k Organizations in 100 Countries.

Conclusion

SPACs investments are inarguably bad from a financial perspective. However, if we see them from a Network perspective we should see they could have a real strategic role in Palantir’s Enterprise Network.

In particular, SPACs could be seen as Palantir’s Bootstrap strategy to help the network reach the Critical Mass from which the network effects generate a dramatic increase in the speed of the Palantir flywheel which is needed for exponential growth (Palantir: This Time It’s Different)

A good metaphor would be the cranks that car engines had before they got electric starters. Once the engine was going, it would keep going, but there was a separate and laborious process to get it going. - Paul Graham, Y Combinator Co-Founder

Yous,
Arny

Join me on:
Twitter: @arny_trezzi
Youtube: @Arny Investing
Instagram: @arnylaorca
Email: arnylaorca@gmail.com
Discord Channel

View expresses are my own. Do not represent Financial Advice.  

I own (many) stocks.