PLTR: favorable long-term outlook despite its inevitable short-term volatility

There is little doubt for one to say that Palantir Technologies, Inc. (NYSE: PLTR) is a rather unique, if not controversial, company. It’s definitely not one of those software or tech companies that investors have grown used to in recent years.

Unlike many of its software peers, Palantir went public only 17 years after its founding. Besides, much of what it does is also pretty secretive and sensitive as it works with government agencies and entities both in the US and abroad, in areas none other than intelligence and counterterrorism operations.

As such, it’s not difficult to find that the company has drawn criticisms and concerns from the bears in the market over the years who have been both vocal and critical about what it does.

I have summarized the three most commonly expressed concerns in this article and will see to each of them, from an investor’s perspective.

Ties with government agencies

Palantir has been a pioneer in data analysis. It was founded in 2003 after the attacks of 9/11, initially with the purpose of providing data analytics and mining software for counterterrorism operations within intelligence and defense agencies.

As such, the CIA has not only been one of Palantir’s early customers, but also investors. The CIA invested in Palantir via its venture capital arm, In-Q-Tel. Given such company background and mission, government agencies and entities have always been an important part of Palantir’s clientele.

The company branched into the commercial arena in 2016. In the first nine months of 2020, commercial clients represented 45% of its total revenue.

As an investor, I respect companies that are ahead of the herd. While we can debate how important it is to have that first-mover advantage, for companies like Palantir, at least we can be sure it’s not another company that is created out of the buzzwords (Big Data / Artificial Intelligence / Machine Learning), only to act as a fundraising machine.

It has been focusing on data mining and analytics when these terms were basically unheard of, or at least, when these were not mainstream investment themes yet.

The fact that its traditional customers have been US government agencies such as the CIA is actually a strong recognition for its products’ capabilities and competency. I can hardly think of a client that can be more demanding than the CIA when it comes to data analytics.

Politically vocal founder

Palantir was founded by big-name entrepreneurs – Peter Thiel (Chairman) and Alex Karp (CEO). As Thiel has been one of the most famous and vocal Trump supporters in tech, investors have been concerned about the company’s prospects under the coming Biden administration.

I personally find this concern groundless. After all, Palantir is not without Democratic allies. Its software was used extensively during the Obama administration and its contract with ICE dated back to 2014.

We have to ask what the alternative is if the US government is going to drop Palantir. It would be for the government agencies to build the software and the OS internally on its own.

In 2018, Palantir actually won the lawsuit against the US Army for not considering commercially available software before developing custom ones. Since then, the US Army and government entities have increased the spending on Palantir and are more tied to Palantir than ever.

Personally, I’m not convinced that there will be a reversal in the trend just because of the new Democratic administration.

Loss-making and cash-burning

Investors also expressed their concern that the company hasn’t figured out a way to profit after 17 years since its establishment.

Unlike the typical tech stocks that investors have grown accustomed to in recent years, such as Facebook or Netflix, Palantir is a very niche player, at least for the time being. The company only has around 130 customers after 17 years of operations.

While many of the recent SaaS companies are helping traditional companies make the Big Data transition, Palantir is assisting large corporations (e.g., Airbus) to solve much more complex issues by leveraging its more powerful Big Data products and tools.

It’s fair to say that the majority of the corporates nowadays are not ready for Palantir’s products, instead of the opposite. But Palantir is well poised to benefit from companies’ increasing reliance on Big Data in the long run, as companies become more sophisticated with such tools.

Palantir also reported encouraging Q3 results with significant growth and improvement in revenue and cash flows. Its Q3 revenue increased by 52% year-on-year while its nine-month cash used in operating actives dropped to almost 55% of the previous year.

That said, with limited visibility into the company’s future pipeline, it will be difficult to conclude that the improvement will continue. But that doesn’t change the company’s favorable long-term outlook as governments and companies increasingly look to Big Data for solutions.

Final words

As an investor, if you believe that Big Data is the future, in my opinion, Palantir is the stock you should own. Short-term volatility is inevitable, given all the controversies surrounding the company and its volatile business nature with lumpy deals. But this actually provides opportunities for long-term investors to buy the dips.


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