Are Palantir's SPACs a SCAM?

Are SPACs bringing any real contribution to Palantir?

Editor: @Emanuele20x

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.

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.

An alarming sign?

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

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.

  

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

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

I own (many) PLTR 0.00%↑ stocks.

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