Analysts are Confused, UK Defence | Palantir Bullets #6
Analysts are Confused, UK Defence | Palantir Bullets #6
This week's Palantir developments and the crowned “Tweet of the Week”
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PLTR 0.00%↑ this week:
UK Ministry of Defence (“MoD”) awarded Palantir with a ~$90mn contract over three years to support its digital transformation journey. Palantir has been working with the UK MoD for over a decade. In May the MoD awarded Palantir with a $12.5mn contract for Foundry, the new contract is a very positive sign of a gradual expansion within Palantir’s second most important market after the US.
According to the Washington Post, Palantir is “The Algorithm that tipped the balance in Ukraine.” Palantir’s solutions, especially Metaconstellation, allow soldiers to penetrate the “fog of war” by having a clear representation of the battlefield thanks to satellites. The article also reports how Palantir is essential in managing Intelligence with NATO partners. What, up to now, was a mix of declarations from Palantir’s management and speculation, is now proof from a reputable third party.
TheTimes, a British newspaper, writes about Palantir’s triumph: “expert point to Ukrainians’ use of Palantir software as significant to their success.” A definitive victory in Ukraine would increase dramatically the chances of Palantir obtaining further contracts from NATO Countries and being one step closer to becoming the first “Software Prime” in the US. Quite remarkably, Palantir has been labelled “Big Tech” despite being a $15bn company.
Wall Street Journal discovers, after 1 year, Palantir invested $400mn in 20 SPACs to receive $700mn in Contract Value over ~5 years. I spoke extensively about how SPACs should be seen as a “thing that doesn’t scale” in order to trigger network effects (Palantir’s SPACs Crucial Role in the Network). Palantir has proven in the last quarters it can grow without SPACs (Palantir Q3 Slowdown: Another Disaster?) and obtain Tier 1 clients like Exxon and Cleveland Clinics without Strategic Investments. Therefore, I consider it a chapter closed. Despite the negative financial results from SPACs, down more than ~80%, I consider these SPACs a ponderated bet that didn’t impact the health of the business as Palantir still sits on $2.4bn Cash.
Bank of America Defends Palantir’s role in Defense. According to Analyst Perez Mora, the Defense business is worth $7 per share alone, meaning that at this price the Commercial business could be bought “for free.” In a previous article, I shared how I reached a similar conclusion (Palantir Sum-of-the-Parts-Valuation).
Other analysts are increasingly skeptical. Morgan Stanley reduced their target price from $10 to $8 due to “limited visibility in the government business” and the need for more "proof” on the Commercial side. Meanwhile, Wolfe Research suggests its clients “Sell” Palantir before it goes below $5. In order to see a major shift in the "Equity Story,” Palantir needs to show that it can transform “Bad Times” into Revenues. However, Palantir’s financials already show precious hints about the future direction (Palantir: We Can See the Future).
Palantir expands in German police amid controversy. Palantir’s modified version of Gotham has been used extensively in Hessen, since 2017, and in North Rhine-Westphalia. Given the success, Palantir will also soon be deployed in Hamburg and Bavaria, but similarly to the UK, it is facing opposition. The Federal Constitution Court has to determine the framework of the operation. Interestingly, it seems the contract for Palantir’s Gotham version deployed in Bavaria is “designed in a way that other states and the federal government can adopt this system without additional award procedures.”
Palantir Extraordinary Shareholder Meeting is a “nothing-burger.” As mentioned previously, the meeting only changed minor details regarding the F-shares.
Pending targets:
NHS Data Platform;
DoD Applications on JWCC;
TITAN.
Related Tech trends/Macro:
U.S. Navy awarded Amazon Web Services contract worth over $700mn over 5 years. The deal includes the provision of AWS’s commercial cloud environment, Professional Services and training and certification courses. In line with what we extensively discussed (Palantir Government: it’s Now or Never), the Pentagon is spending heavily. New contracts for Palantir could arrive soon.
Lockheed Martin achieved over $1bn defense contracts for its F-35 aircraft. Palantir could indirectly benefit from this since Lockheed is a client.
The weakness of the Tech sector attracted a record year for PE-backed Deals in 2022. As mentioned in the previous Bullets#2, the M&A activity was generally weak in 2022, but Private Equity never sleeps, in particular when software valuations drop. If Palantir didn’t have F-shares to protect itself, it would be an appealing target at ~6x EV/Sales.
Tweet of the week
Merry Christmas!
Yours,
Arny