August 9, 2022
RBC: Palantir Technologies Inc.
Our view: We remain Underperform on Palantir, following our analysis of the 10-Q and upon updating our SPAC tracker. Most importantly, we estimate the SPAC-related TCV potentially at-risk of not fully converting into revenue is $406M (note some of this may have already been recognized) and count at least 15 SPAC customers that have substantial doubt as going concerns (based on their respective filings). Separately, incremental data points from the 10-Q were scarce, given Palantir stopped disclosing (as of last qtr) deal value by segment and revenue/margins by customer maturity.
Key points: We maintain our Underperform rating and $6 price target on Palantir, following our analysis of the 10-Q and updating our SPAC tracker.
Our key takeaways from the 10-Q:
- Quantifying the amount of deal value related to SPACs which could be at-risk. We maintain our cautious view that Palantir’s SPAC revenue stream (~$30M per quarter) could be at-risk due to the financial profile of these customers — as noted above, we estimate $406M of TCV which
might not fully materialize into future revenue. Our calculation is based on summing the deal value from SPACs with either zero revenue or where the TCV exceeds the customer’s 2021 revenue. See pg. 2 for our detailed SPAC tracker.
- No notable updates regarding specific investments. Only one deal remains pending (Rubicon, scheduled to de-SPAC in 3Q22) and there were no new investments or commentary on terminated deals relative to the last 10-Q. We note that this is somewhat at odds with 2Q22 earnings call commentary (“we voluntarily terminated several contracts related to investment commitments…”), suggesting there was a number of early- stage SPAC deals still in the pipeline but not yet announced.
- Contribution margins. Palantir’s contribution margins (COGS and S&M expense, divided by revenue) by segment shows Commercial Contribution margin contracted 320 bps QoQ (likely related to sales force hiring), while Government was up 60 bps QoQ.
- Total headcount growth accelerated to 26% YoY on 212 net new hires in 2Q22, above the four-quarter average of 140 (137 in 1021). This paired with management’s indication of no change to hiring helps explain the subdued profit outlook provided on the call, in our view.
- Recall, disclosures are more limited now. Beginning last quarter, Palantir stopped providing a breakdown of deal value by segment and disclosing revenue/contribution margin by customer maturity level (acquire, expand, scale).
Stepping back, the 10-Q offered limited incremental data points and does not change our thesis. Palantir trades at 8x EV/CY23E revenue, above the peer group, while our $6 price target is based on a 5x multiple.
Below we provide our updated strategic investment tracker as well as details and insights on Palantir’s strategic investments:
- This list includes 24 companies, 21 of which are SPACs (one canceled), 1 private company
(Skydweller, no announcements to go public), 1 planned IPO (Hyundai Oilbank), and 1 Direct
- 21 of these companies are now publicly listed; none of the 20 listed SPACs are trading above
their $10 reference price (the vast majority are now trading in the <$5 penny stock range).
- Of the 14 SPACs that provided CY21 revenue forecasts, only 8 actually hit their initial revenue
targets (many of those had most of CY21 already in the books). Further, we have increased
worries that some of these companies may be entering “cost saving mode” such as BlackSky
who is now targeting ’22 Capex at $52M-S56M (vs. ~$120M initial ’22 Capex forecast).
- Many of these companies are early stage, at least 5 did $O in revenues in 2021. We estimate
that the TCV of multi-year subscription agreements with Palantir is a materially large percent
of revenue (~100% or more) for at least 14 of these companies.
Palantir notes that these subscription arrangements range from 3-10 years. Of the 11 companies that disclose a date range for their subscription agreement with Palantir, 9 companies are within the 5-6 year range and 2 companies have contracts of 3 years or less. Further, these agreements have varying degrees of linearity. For example, AdTheorent’s contract calls for $20M to be billed in equal quarterly payments over five years. At the other end of the spectrum, Boxed has a $20M contract over 5 years, $15M of which was billed and due following the company’s de-SPACing (December 10, 2021).
- We found 12 disclosures of stated TCV contracts in target company filings. Generally, the $
amounts of TCV deals are extremely consistent with Palantir’s $ investment in the company,
with the average TCV-to-investment ratio being ~1.3x (range is 0.9x-2.0x). Further, this average
1.3x ratio does align with Palantir’s stated TCV of strategic investments ($638.7M excluding
contractual options) to aggregate investment amount of $450.5M, which implies a ratio of
- Only one deal status remains pending at this time — Rubicon Technologies ($35M contract
with Palantir), which recently received shareholder approval for de-SPAC and is scheduled to
begin trading in 3Q22.