Investment:
Risks Of Palantir:
Management:
Product:
Company Downsides:
Philosophy:
Investment:
Investment fund 10XDNA believes that as a society, we are facing a decade of exponential technological progress, and within the next 10 years – “our world will change more extensively and profoundly than in the last 100 years”.
Wright’s Law is a hypotheses that there is a “20% reduction in cost, when production doubles”. In so far as 1000 units have been produced, the cost per-unit decrease by 20% when production reaches 2000 units. Another 20% reduction is apparent at 4000 units, and at 8000 units, and so on. This idea states that cost decreases as a power law of cumulative production.
This can lead to a flywheel within innovation.
Chief Research Officer
We can conspicuously see Wright’s Law in action, through the Human Genome Project. As reported by NHGRI Genome Sequencing Program, the cost of sequencing DNA bases has fallen majorly (more than 700,000 fold) since the first sequencing project. This outstanding improvement from the Genome Sequencing Program has revealed the exponentially large cost reductions that are occurring, whilst simultaneously increases within output.
Intertwined closely with Wright’s Law is the ideology of the acerated law of returns. This theory posits that technology change is exponential. Within the next 100 years, we will not experience 100 years of progress. But instead, we will experience over 20,000 years of progress within the next 100 years (at today’s rate). Furthermore, and excitingly, Kurzweil suggests that there is even exponential growth within the rate of exponential growth.
This means that, within a short period when machine intelligence surpasses human intelligence, this will lead to a singularity. A singularity is a term used to indicate technological change that is so rapid and product, it creates a rupture in the fabric of human society.
The philosophy of exponential change, stating that within the next 100 years we will experience over 20,000 years of progress, evidently shows the huge potential to ride large innovative waves within markets.
The innovative fund explains their investment decision, and in terms of fund weighting, Palantir & Tesla is jointly the largest positions in the fund,
“According to IDC, the market for business intelligence / analytics data management will be around 250 billion US dollars in 2024 . Palantir itself put the addressable market at around $120 billion in 2020. There is no doubt that a significant market exists here. In addition, several investment banks conducted surveys of CIOs of large companies at the time of the Palantir IPO (fall 2020).”
“Credit Suisse found that 55% of all CIOs consider business intelligence to be one of their top priorities. Only the topic of cyber security has a higher priority at 65%, while cloud, ERP or collaboration tools, for example, have a significantly lower priority.”
Risks Of Palantir:
From our point of view, the greatest risk is the attempt by some companies to independently master the heterogeneity of their data and systems. They usually rely on proprietary solutions for this, which means that Palantir does not even enter into discussions with these companies.
As a rule, Palantir needs a contact person at CIO level in the first step in order to then be convincing at N-1 and N-2 level. Without a positive track record of success and experience (such as SAP can show at many companies), these discussions are not a sure-fire success. If Palantir is not able to convince here, this can significantly slow down the previously exponential growth path and have a significant impact on the value development.
Our discussions within the targeted industries also revealed that Palantir offers products “5-7 years before companies realize they really need them” – this could become a hurdle in the sales cycle.
All relevant competitors will invest significantly in integrated business intelligence capabilities. Should one of the competitors catch up with Palantir or overtake the company, this would also have a corresponding impact on performance.
Foundry is the interplay between 3 dynamics: also referred to as an OS.
The 3 dynamics Foundry interplays within includes:
- Data platform: includes security, health-checks, versioning of data, pipelines at scale.
- MLOPS lifecycle: ability to deploy ML at scale.
- Operational workflows & application building: build applications via low/no code & define the business processes for set matters.
Overall, this creates an OS: PLTR is the interplay between these 3 main dynamics.
– The idea of a central operating platform can be broken down further into 4 main areas more fluently:
1) Firstly, through Palantir software, one can “drag & drop” certain tools, features, & partnered applications onto the project. This can be done fluently, meaning that the tools, features & applications communicate & work in conjunction with each other. As well as Palantir having innate tools (data visualization, AI, ML, ontology) within their platform, one can also leverage these innate tools, & use them in conjunction with partnered features & tools in order to derive the most value. Example of PLTR partnership with Amazon AWS: “Rapidly prepare data with Foundry’s data connection, extract, transform, load, and data branching capabilities, and then drag & drop AWS tools on to the project to analyse data and develop models.”
2) Orchestrate & bind the IT landscape together. This means that, instead of replacing old data systems & tools within the organisation, through Palantir, organisations can intertwine their own bespoke data systems & tools, in conjunction with more modern tools & applications – & overall use these in communication with each other.
3) Network effects refers to the low code, no code environment of Palantir OS. This enables anyone & everyone in the organisation to use the platform, create new applications & features, regardless of technical ability. Changes can be shared across the organisation, revealing how the product becomes more useful as more people use it.
4) Contextual data. Data is transformed into people, places, & things – which makes the data come to life.
Chief Executive Officer
Management:
The innovative fund explains:
“Both Alex Karp and Peter Thiel are certainly controversial figures (see e.g. “The Contrarian: Peter Thiel and Silicon Valley’s Pursuit of Power”), who position themselves very clearly in public, also or especially in political and ethical questions. This also always involves a “headline” risk, which can lead to companies or organizations deciding not to work with Palantir. This can have a significant impact on the further development of the company’s value, which we will go into more in depth in the sustainability section.”
“A mission-critical challenge for almost every tech company is talent acquisition. In order to be able to grow successfully in the next few years, Palantir must win over the leading minds in its core areas, such as artificial intelligence, software development, FDEs and sales. This applies in particular to the launch of new products, but also to the expansion of business outside the USA. If Palantir is unable to attract relevant talent, this can have a significant impact on the company’s performance.”
Product:
“We believe that Palantir is at the beginning of another exponential development and will increasingly be able to transfer its technological capabilities to the corporate sector with Foundry. The business model promises a high proportion of recurring revenues and a very attractive gross margin of 82% in Q2 2021. The so-called “contribution margin”, i.e. gross margin less SG&A, was 58% in Q2 2021.”
“Palantir strives to support the most relevant organizations in the most important projects with its solutions. Significantly reduced implementation times lower the hurdle of integrating the software in companies. Based on these findings, Palantir could serve well over 1,000 customers in 2030, similar to large management consultancies such as Boston Consulting Group or McKinsey & Company.”
“We also believe the company will be able to continue to significantly grow average revenue per customer, roughly doubling by 2030. Already today, Palantir’s sales, driven by the breadth of the services and the claim to be a real operating system, are on a completely different scale than other “Software as a service” models.”
“In combination with the high gross margin and the recurring revenue from subscription revenues, these two growth trends result in a very attractive financial profile over the next few years in our view.”
As mentioned by Ondrej, from Darntons, On the other hand, Palantir is industry agnostic. The goal of the company is to solve complex problems wherever they arise. Across industries, Palantir spreads the tentacles and latches onto everything that has the potential to become great or fixes potential declines that might plague certain companies or industries of the old world.”
SPACS:
“There has recently been a lot of discussion about the fact that Palantir buys sales at high prices through equity investments in young technology companies. Of the 20 new customers from Q2 2021, Palantir has equity interests in the companies or the associated SPACs in seven companies, such as Wejo (software for connected cars), Gecko Robotics (robots) and FastRadius (3D printing). Of course, one can discuss whether all of these companies would also be customers without equity participation. Basically, however, we have a fundamentally different opinion on this than some research analysts: In our view, investing in young technology companies is a really smart way to:
- Build a Palantir ecosystem and grow with the businesses
- To get much broader insights and to optimize the software and the artificial intelligence behind it on this basis and
- Build a really strong VC-style portfolio, which offers the opportunity for significant returns (see also Tencent’s outstanding VC portfolio here)”
Palantir, since inception, have battle-tested their software within the context of intelligence agencies, and the Governmental sphere. We believe that this initiative was paramount for the success, and viability of Palantir’s’ current products. This is because, throughout the Government sphere, Palantir over an 18 year period were trailing, testing, and adapting their software within some of the harshest conditions possible.
The philosophy of SPAC indicatives is very similar, if not identical. This is because, through the SPAC initiatives, we believe that this is a methodological approach for Palantir to test, trial and adapt their software to the needs of smaller companies, and early stage start-ups. This will enable Palantir to gain insights into the needs and necessities of small start-ups, and the ability to identify innate weaknesses and strengths of their current software’s.
Overall, we believe that this unconventional approach to business is reinforcing the ideological view of Palantir – namely their anchoring towards a 10+ year vision. Whilst Palantir current do not have any viable competitors within the OS scene, recent commentary has suggested that there is much concern over big-technology giants, such as Google, eventually competing within the OS space against Palantir.
Company Downsides:
Our assessment of the company is based on the opportunity for exponential growth. At Palantir, customer acquisition is often driven by pilot projects that generate little or no compensation.
Should Palantir not be able to win customers as a result of these projects, this can have a very lasting impact on the value development. According to our assumptions, the average revenue per customer is also increasing significantly, even if it is already well above other software-as-a-service companies. Palantir is generally perceived by customers as expensive, which underlines this risk.
A loss on one of the significant investments in young technology companies can also have a negative impact on the company’s value.
Important point: On the cost side, Palantir has always worked very progressively with so-called “stock-based compensation” over the last few quarters, in which shares have been issued to top management at reduced prices. In the last few quarters, this has meant that the non-adjusted operating results have been negative. In 2020, for example, around 1.3 billion US dollars (!) were invested in this type of compensation. In our understanding, this issue of shares was linked to the IPO and corresponding membership in the company.
This practice typically leads to dilution of the other shareholders as new shares are issued at a lower price (the corresponding exercise price of the option – “Strike”). It is our understanding that approximately 30% of the total share capital remains outstanding in stock options and restricted stock units which may result in further shareholder dilution.
We are for aligned interests between shareholders and top management. Stock options, or RSUs, which are only ever worth as much as the stock price minus the option’s exercise price, are a good way to do just that, in our view.
The magnitude and the possible dilution here are certainly at the upper end in a market comparison. In our valuation of the company we are therefore adjusting for stock-based compensation costs but will keep a very close eye on further dilution.
Based on the publications in the last quarterly report, we assume that the amount of compensation will be halved next year and will only be between 100 and 200 million US dollars in 2025. However, should the company continue this practice excessively, it may have a negative impact on performance.
Philosophy:
The innovative firm said,
Palantir positions itself very clearly as a company that supports the government and government-related organizations in the US and within the US Allies Group. Thanks to the high security classification by the US Department of Defense, for example, this has significant advantages for orders in this area. At the same time, however, it also excludes certain geographies and thus restricts growth elsewhere.
In addition, a correspondingly clear positioning in combination with working with sensitive data, in conflicts or in operations related to the secret service always ensures a “headline risk”. One or the other company leader may not find this beneficial when making a decision. In the past there has already been negative press coverage of the company.
On the other hand, we see an ever increasing trend towards increased security requirements based on regulatory requirements, but often also as a clear part of corporate policy. We believe Palantir will benefit from this. “That the company has never been hacked,” found one of the Palantir customers we spoke to, “a huge selling point.”
Palantir, co-founded by Peter Thiel, will “continue to use its technology to support Ukraine.”
Wendy R. Anderson said:
One of the many reasons I am so proud to work for Palantir Technologies. Alex Karp, my boss and our CEO, is the first CEO to visit #Kyiv after the start of the full-scale war. We’ve agreed to continue investing in #Ukraine by supporting the Army and opening an office, etc. This is what leadership looks like, full stop.
This comes after CEO Alex Karp attended a meeting in Ukraine with President Volodymyr Zelenskyy.
Overall this highlights the fact that Palantir likely played a major role when it comes to the conflict within Ukraine.
“I believe we that we are in a fundamental change in the character of war, and by that I mean how you fight, where you fight, the doctrine, the equipment, the tactics, techniques and procedures, and so on,” Milley said. “We’re in the middle of a real, unbelievable fundamental change, which is probably the biggest fundamental change in the history of warfare.”
It is likely Palantir will play an increasingly vital role within Governments & the future of warfare.
Valuation:
“This model leads us to a current fair value of the stock of USD 25-30 . This corresponds to a target course for 2025 of around USD 37-42 , which is decisive for us.
Palantir was able to show an adjusted gross margin of 82% (USD 1,271 million) in 2021, which is what we expect from a software-as-a-service company of this magnitude. We keep this margin constant in our model until 2030. Adjusted operating margin was 31% (USD 474m), both SG&A and R&D benefited from economies of scale and are relatively vs. 2020 fallen.
The company’s long-term forecast for operating margin is 35%. Free cash flow was USD 424 million (margin of 28% on sales) – Palantir achieves sales and growth with very low capex requirements and currently negative working capital.
These results correspond to the “adjusted” business figures, which differ from the GAAP figures essentially by not considering the so-called “stock-based compensation” as an operating cost item. New shares to be issued or options on these shares are used as a compensation component for existing and new employees.
Palantir made intensive use of this type of employee payment before the IPO, but also afterwards. In principle, we consider this type of compensation to be indispensable in an environment in which the best talent is important and one of the best ways to incentivize employees to achieve shareholder goals and to retain them in the long term.
Other fast-growing technology companies also make extensive use of this tool. From our point of view, however, Palantir has overshot the mark a bit. “Stock-based compensation” in the amount of 50% of sales as in 2021 is in our eyes absolutely at the upper end of what is reasonable.
In the Q4/21 earnings call, Alex Karp made it clear that the company is aware of this imbalance and that profitability without adjusting the stock-based compensation (SBC) must also be the medium-term goal. After consultation with Palantir Investor Relations, we assume a bounce basis of around 36% of sales (Q4/21) for the modeling of the SBC and reduce this to 23% by 2025 and to 10% by 2030. We see SBC as a whole as part of personnel costs.
For our modelling, we look in particular at the combination of “cash payment” and stock options.
For example, we are assuming a sum of SG&A and stock-based compensation of 94% in 2021 and expect this ratio to decrease (primarily due to a reduction in the SBC ratio) to 60-65% in 2025 and 45-50% in 2030. Based on a stable gross margin of 82%, a slightly falling R&D margin and the growth assumptions described above, this leads to GAAP breakeven in 2024 and an adjusted EBIT margin of 30% in the same year. In the long term, we consider a GAAP EBIT margin of ~25% to be realistic.”
