✍️ Dear Mr. Market, You Are Wrong

↳ My Palantir investment thesis in one page.

Editor: Emanuele Marabella

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.

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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View expresses are my own and DO NOT REPRESENT FINANCIAL ADVICE.
I own PLTR 0.00%↑ stocks.