Summary
We give Palantir a SELL rating. Palantir is a solid company with good fundamentals however the valuation is too compared to fundamentals of the company. The growth rate isn’t high enough to warrant such an incredible valuation.
Understanding a business
Palantir is a software company that specializes in data analytics. Palantir’s mission is to help organizations make sense of large and diverse datasets to drive decision-making and solve complex problems. Palantir develops and provides software solutions that enable organizations to integrate, analyze, and visualize large volumes of data from disparate sources. This software is used for a wide range of applications, including fraud detection, cybersecurity, supply chain optimization, and counterterrorism.
The two main platforms that Palantir operates are Gotham and Foundry. Gotham was originally meant for use by US intelligence agencies. It’s designed for complex, classified data analysis and is used for tasks such as tracking criminals and terrorists. Foundry is designed for more general data analytics and is used across various industries, including finance, healthcare, manufacturing, and retail.
Palantir makes money from long term contracts that are on a subscription basis. These subscriptions provide revenue visibility and stability. The moat that Palantir operates with is that they are now established in the government contract space. The intelligence agencies don’t switch vendors with great frequency due to the classified nature of the work that they are doing.
The commercial industry segment of their business has more potential for competition because their business is software. Software companies can be started to provide competition much quicker than other businesses
Valuation Metrics
Using Finviz we can look at important metrics for assessing Palantir’s evaluation. Finviz is a great tool because it organizes metrics into one place and is easy to read.
We can see that Palantir is valued at $33 Billion by market cap. Currently PLTR does not have a positive earnings per share and therefore does not have a P/E. An interesting metric to note is that this company has no long term debt. That is a good thing for these newer companies because it takes off a lot of the bankruptcy fears that new IPO companies could face. The valuation is looking quite expensive based on price to sales, price to free cash flow and the forward P/E.
FAST Graphs Analysis
FAST graphs is a tool used to evaluate a company’s share price compared to its earnings. The black line represents the share price and the orange line represents the earnings multiplied by 15.
On the FAST Graph we see the IPO price is far above any earnings the company has had. The share price has stayed above the earnings. Analysts do predict an increase in earnings in the next few years however the share price would need to come down to meet the value of the earnings.
Bull Thesis
Palantir has a high growth profile as a software company and the US government is a very profitable customer. Palantir currently has no debt and is well positioned for poor market conditions and good market conditions. Palantir benefits from the recent developments in AI to help continue to drive growth. Governments internationally and commercial companies will want to process as much data as they can in the battle for AI supremacy and Palantir is well positioned to capitalize on that market trend. The operating margins for this company are high as a software company holding above 20%.
The commercial business grew 50% from the same quarter the previous year. This demonstrates the potential for massive amounts of growth in that sector for the future. The more ubiquitous their software becomes then the more companies will need to be using them. This could become a vicious demand cycle that leads to exponential growth.
Bear Thesis
The valuation is too expensive for the value that you are getting for purchasing the company. A $33 Billion dollar valuation for a company that only has $500 million dollars in revenue. The growth rate is also quite low for such a high valuation. The 20% yoy revenue growth rate does not deserve the valuation that they have.
The commercial sector is subject to much more competition. Data analytics software companies can join the market and challenge Palantir for market share. It hasn’t been demonstrated that their moat can sustain the challenge from competition in the commercial data analytics business.
SELL Rating
Basil Leaf Capital rates Palantir a sell rating. The sell rating is dependent on the valuation of the company. We think that the company is strong with solid fundamentals and a foothold in the government contract business. The valuation is just too high compared to the fundamentals of the company. If the revenue is $500 million and the margins are 20% and apply a 20 multiple then the market cap should be around $2 billion. We would be interested in Palantir if the valuation became more reasonable. The forecastable revenue and long term contracts are a benefit as well as the debt free operation.