CEO Alex Karp Interview:
Wall Street Summary:
Economist On Palantir:
CEO Alex Karp Interview
AI & Ukraine:
Over the past few days, Alex Karp was featured within interview format at the Responsible AI in Warfare Event 2023. There are some important takeaways I want to reiterate.
Firstly, Alex spoke about the use of Artificial Intelligence, and it’s relation to the battlefield.
What I want to highlight is the fact that Palantir is most certainly within an incredibly unique position, in which the company has the ability to gain access to “cornered resources”, namely data and insight from the battlefield. This therefore results within increased utility of the platform, both for the commercial and Governmental segments.
Interestingly, whilst consensus currently is focused upon consumer facing AI – via the use of ChatGPT, Palantir has been working on military facing AI for many years. This likely was catalysed further in consideration of the Ukrainian conflict. In knowledge of this, and in light of other potential competitors for Palantir, Alex Karp stated how literally no other company has the capabilities to provide a solution in which can compete against Palantir, specifically on the battlefield.
The reason as to why is based upon one major principle:
- Firstly, the idea that any software solution MUST be used within a real world context in order to prove itself. Most commonly, these software solutions are solely PowerPoints, or visions of a product in which one aims to build – however is not actually built today. Thus, Palantir innately has an advantage regarding usage and the perceived utility. Why? Well because, the product has actually been used within a real-life context, and further – it has transformed Ukraine into a juggernaut – thus indicating the superiority of the platform.
In addition, Alex Karp ranted passionately at the event when speaking about the new dynamic of warfare – namely software – thus representing a non-linear-advantage in opposition to prior means of conflict.
Whilst wealth of a nation, and investments within military equipment were previously the two most important principles when computing the success of a nation within the context of conflict, now another dynamic is apparent. This other dynamic is software – in which according to Alex – represents power analogous to that of nuclear weaponry.
The point being is that, according to Alex Karp, the nation that achieves superiority in software AI, shall dominate the world order. Alex went on to reiterate the fact that Artificial Intelligence within the context of conflict is not linear, but instead exponential. This means, AI is a winner-takes-all initiative.
“The digitalised lift granted by AI is so great that powers that know who to implement this can beat nations that have been investing billions within conventional means – for decades”.
Lesson For West:
Furthermore, Alex Karp noted the importance of the West to spend significantly more upon software AI. It is apparent currently that within the West, solely LESS THAN 1% of total budgets for defence go towards software. Whilst Alex recognises the importance of hardware, he also emphasises the necessity for greater investments within software from a Governmental perspective.
The CEO noted that Governmental Officials must ask serious questions to other software companies, such as: “if the software in question has actually been used within the Battlefield?” Fundamentally, this technology that Palantir have built takes over “5 years to build”, if organisations are very good at it. Plus, the notion that this software can not be built solely within the context of a lab- but instead needs action on the battlefield to actually test the capabilities. Once again, highlighting the importance of the Palantir software solution, and the deep technological moats in which are hard for other companies to overcome.
“US has continuing resolutions” – there is just a different level of interest in what we provide.”Alex Karp
Karp went on to state that: “if it is war in the East, or balloons over our society – this is a world in which is dangerous. This world needs AI driven solutions and software, and there is no other company that has focused on this for the past 20 years.”
Interestingly, investment firm Piper Sandler says, “Palantir should continue to see growth in its U.S. government business as it broadens its footprint across agencies and as its largest customer (Defense) is expected to grow further”. The investment firm state how, Palantir has gained more traction with agencies beyond defence, such as VA and DOE, which will provide ongoing upside.
It can be logically stated that in consideration of Palantir’s ingrained work with Governments, and their supernatural product capabilities, Palantir is likely to experience more spending within the context of the US Government. This is because, as the requested discretionary budgets for the Department of Defense are expected to increase 5% in FY2022 and another 4% in FY2023, on-top of this is the emphasis on Space expansion via the US Space Force.
Sandler estimate that of the 44% of revenue Palantir gains from the US Government, it is estimated that at least half of this is generated from the DOD. “It also demonstrated the effectiveness of its data platforms to agencies such as the FDA, NIH, and Air Force in 2020, which could provide it opportunities to grow in future years as it maintains these platforms and expands its partnerships with them.”
Wall Street Summary:
Healthcare & Major Projects:
One interesting factor I want to look into is in regards to a Goldman Sachs report that we shared on Darntons Premium. The analysts at the investment firm mentioned that, Palantir has achieved partnerships with 4 healthcare providers within the US, equating to 10% ownership of the entire US healthcare market.
For me, this highlights two important points. Firstly, is this idea of innovation thriving within periods of chaos. What is apparent is the fact that within both the healthcare, and the military scene – areas that have experienced mass disruption recently – Palantir Technologies have thrived majorly.
This is an indication regarding the utility of the product.
Specifically upon the healthcare sector, in which Palantir works with 4 of the largest US healthcare organisations, this highlights the exponential growth apparent over the past 2 years within the Palantir healthcare sector.
Palantir healthcare business achieved 267% growth between 2020 and the first half of 2022 as explained on the August 2022 earnings call. Those who have been paying close attention are not surprised by this exponential expansion.
That means healthcare accounted for 37% of commercial revenue in H1 2022!
Moreover, this speaks towards the necessity of “high quality” revenue, and how I believe Palantir is following a similar strategy to Facebook, back during inception phases.
Facebook, originally started via the monopolisation of Harvard, later slowly monopolising other “highly respected” colleges in the US. The reasons as to why this is beneficial is not solely due to the easing of friction associated with initial adoption, however also and more relevantly due to Facebook gaining “quality” customers on their platform,
Evidently, if “high status” students at the top universities are using a certain platform, this will incentive adoption for other students in the campus, and eventually around the world. Thus, this was likely a fundamental factor that contributed to Facebook’s early success.
The same is true for Palantir.
Palantir have started via the monopolisation of “high quality” clients. However now, after domination in this area, will move down the value chain to smaller organisations in an attempt to democratise the platform further.
In relation to healthcare, the fact that Palantir has gained deals with 4 of the largest healthcare providers within the US – equating to ownership of 10% of US healthcare market – this indicates the importance of the product. If Palantir is able to access these “high quality” customers, then the ability to gradually expand, and thus access smaller clients is almost inevitable.
The main takeaway being is that quality of clients represents and highlights the utility of the software solution.
Goldman Sachs analysts noted within the report that Palantir also called out utilities, automotive, energy, manufacturing, and supply chain as focus areas for their evolving commercial go-to-market strategy.
“Palantir’s Government business has compounded at a 43% CAGR over the last 4 years, and management remains excited about the opportunity ahead, with the company’s products currently deployed on the front lines of various geopolitical conflicts across the globe. For example, in 4Q, Palantir signed a deal with the British military for up to GBP 75 mn to help modernize their software systems. While management is hopeful that the Government business will re-accelerate growth back to the 25-30% range over time, the path to get there will likely not be linear given the lumpy nature of the business.”
As Alex Karp said, the “US has continuing resolutions, however there is just a different level of interest in what we provide.”
Within recent times, the Department of the Air Forces have been very vocal in terms of issues caused by the use of continuing resolutions to fund the federal Government. Interestingly, and to ease concerns of Palantir investors, Air Force Secretary made the case that a CR in the upcoming 2023 fiscal year would have a majorly “negative effect”.
Kendall explained how operating over a CR keeps spending levels frozen from the previous year’s level in which limits the DOD’s ability to adjust for impacts of inflation and other increases within budgets.
“The thing that’s unique about this year is that inflation is occurring and is somewhat unpredictable, and a CR locks you into a previous year’s level of funding when prices are increasing. So you need to get to a point where you can make some adjustments because of that,” Kendall said.
As stated beforehand, the Space Force is projected to gain a 36% increase over 2022 within budgets for 2023. Any more CRs would majorly delay these funds, in which can deter the growth of the service, indirectly also creating volatility in terms of contracts for companies like Palantir.
Regardless, the main takeaway is the fact that over the short term, revenue within the Government is often lumpy, and thus experiences periods of downturn. This is due to the bureaucratic nature and accountancy of the Government, thus causing delays within the short term to deliver revenue. Yet, over the long term, this revenue is realised and equates to a staggeringly high CAGR.
“As global geopolitical tensions persists and macro uncertainty remains, we believe companies,
like PLTR that are indexed (56% of sales) to non-cyclical government budgets sit on an
advantageous perch that drives more stability in its results. We see past contract performance,
technical capabilities, and culture aligned with western government’s as uniquely positioned to
grow their government business from $1 to $2 B in ~3 years irrespective of macro conditions.”
This highlights a unique capability about Palantir: namely, the ability to gain consistent revenue from the Government, whilst also growing their commercial business. Thus, this shall translate into “predictable” growth for the Government – over the long run – in conjunction with the likely factor of strong future commercial growth.
Raymond James also mentions: “with positive cash flow, the pivot to profitability, expectations that appear reasonable, and ~16% of the market cap in cash we are reiterating our Strong Buy rating and price target of $15.”
The Prosecutor General of Ukraine tweeted out today, the following:
The thread went on to explain:
“Ukraine would benefit greatly from extending the use of Palantir software for prosecutorial purposes — to systematize and analyse war crimes evidence. @GP_Ukraine would appreciate the expert assistance and training to implement the technology in our daily work. 2/3”
“This will help investigate the massive atrocities committed by the Russian military in Ukraine and hold the perpetrators accountable. 3/3”
This indicates how Palantir software is innately sticky, and thus leads to continual use over time. As expressed via the following data, through the initial adoption of Palantir software, over time this leads to huge growth, based upon the utility and stickiness of the platform:
Palantir has been depending relationships with Governmental customers since inception, over 10 years ago. These relationships have developed deeply, and Palantir is now the cornerstone software solutions within the US Government specifically. Below is a list of all of Palantir’s Governmental contracts thus far, and should highlight the stickiness of the software solution.
- Health & Human Services
- Department of Homeland Security
- Veteran Affairs
- Department of Energy
- Department Of Justice
Furthermore, for the Government, these contracts are increasingly ingrained into the very fabric of the departments.
Piper Sandler successfully demonstrates the utility of Palantir’s software solution, and the fact that Palantir has a sticky product offering. “PLTR has maintained long-lasting relationships with government customers. PLTR has maintained relationships and contracts with the Army, Navy, U.S. Special Operations Command, CDC, ICE, and FBI for at least 10 consecutive years each. We believe these long-lasting partnerships demonstrate both the usefulness of PLTR’s platform and high switching costs once embedded.”
Economist On Palantir:
“Much of the Western military hardware used in Ukraine sounds familiar to any student of 20th-century warfare: surface-to-air missiles, anti-tank weapons, rocket launchers and howitzers. But Ukraine’s use of Western information technology, including artificial intelligence (ai) and autonomous surveillance systems, has also had a powerful, if less visible, impact on Russian forces. Commercial vendors supply Ukrainian troops with satellites, sensors, unmanned drones and software. The products provide reams of battlefield data which are condensed into apps to help soldiers on the ground target the enemy. One American defence official calls them, appreciatively, “Uber for artillery”.
“The other is Alex Karp, an eccentric doctor of philosophy with an Einstein-like mop of hair. (Mr Karp used to sit on the board of The Economist’s parent company.) Palantir, his Denver-based software firm, builds digital infrastructure to help clients manage lots of data, be it on security threats, health-care systems or factories’ productivity. Like SpaceX, it has blazed the trail for civilian-military ventures since he co-founded it two decades ago. He makes bold claims. Palantir, he says, has changed the way Ukrainian troops target the enemy, and even the nature of counter-terrorism. He credits its software with saving millions of lives during the covid-19 pandemic. It may not all be gospel truth (the description of British journalists he delivers while staring at Schumpeter—“bad teeth, hard questions”—is only half true). Yet there is little doubt Palantir is supporting Ukraine both on the ground and as part of nato’s intelligence network. On February 13th, when it reported its first-ever quarterly profit and Mr Karp hinted that his firm might be an acquisition target, its market value rose to $21bn.”
“Palantir has tentatively started to achieve that status, but with a “dual-use” business model. It works for private clients as well as governments (albeit only ones friendly with America). Both on the battlefield and in business, its software cuts through the thickening fog of data to enable quick decision-making. Other dual-use firms are increasingly winning defence contracts. The Pentagon’s Defence Innovation Unit, set up in 2015, supports a big increase in the use of commercial technologies, such as ai, autonomy and integrated systems, to speed up the responsiveness to global threats.”
Future Of Warfare:
This article touches upon the future inflection point of warfare, a market likely to be worth $100s of billions within the future:
Interesting news has released within recent times in which points towards a major overhaul of military spending & technologies, specifically within the US.
Alex Karp has reiterated within previous interviews that the race towards the best technologies within the military is not linear. Instead, this is exponential. Karp was hinting towards the importance of the US & West investing within the best technologies for modern warfare. The nations that get the best technologies first, are likely to experience exponential growth curves when it comes to the utility of data & innovative technologies.
The future of warfare is going to encapsulate artificial intelligence, robotics and other advanced technologies, according to Army General Milley.
The nation’s top military officer said during a trip to Europe this week that he’s working on recommendations that could lead to a high-level reorganization. After launching Army Futures Command in 2018 to drive modernization when he was that service’s chief of staff, Milley said he’s mulling a similar effort for the joint force.
The director of the Defense Intelligence Agency described the sharing of information and intelligence between the United States and the Ukrainians as “revolutionary in terms of what we can do”. Army Gen. Paul Nakasone, who heads both Cyber Command and the National Security Agency, said that “in my 35 years” he has never seen a better sharing of accurate, timely and actionable intelligence than what has transpired with Ukraine.
“We’re going to have to really think hard about fundamental shifts to our military,” Milley said in London. “The country that maximizes development of these technologies with their doctrines and organizations, in the time we have available, could be decisive in the next conflict … I would suggest, in 10 to 15 years, you have to do these fundamental changes.”
The Pentagon has been trumpeting its stepped up investments in emerging technologies and last week made its latest tech-focused organizational move. An Emerging Capabilities Policy Office will help integrate autonomous systems, hypersonic tech, directed-energy weapons, and other innovations into the department strategy, planning guidance and budget processes.
The principal military advisor to the president and the secretary of defense, Milley said he is also thinking through the implications of emerging technologies, following the lead of Defense Secretary Lloyd Austin. The military is examining options for operational design and structure of the force ― its brigades, divisions and fleets ― but also its institutions.
Milley said that the existing technology behind Fitbits and iPhones allow soldiers to sense their environment like never before while accurate, long-range precision munitions let them destroy targets like never before.
Coupled with AI’s potential to speed battlefield decision-making and the robotics and the autonomous technologies that are transforming the character of labor, militaries and warfare could be entirely transformed. Trucking, which is already adapting to driverless vehicles, and other industries that lend themselves to robotics will fundamentally change, Milley said.
“With respect to the military, that’s no less true. We have a wide variety of tasks that can be and probably will be conducted by some form of robot,” he said. “The unmanned aerial vehicle is an example, but you could see in the future, pilotless air forces ― manned/unmanned teaming where you have one aircraft that’s got a human in it and the rest of the squadron are robots.
“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.”