Palantir Technologies Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Palantir Technologies Inc. is a software company that specializes in big data analytics, primarily for governmental and large commercial enterprises.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Palantir Technologies Inc. (PLTR) operates two primary software platforms: Gotham and Foundry.

Gotham is tailored for government agencies, primarily focusing on defense and intelligence operations. It enables users to identify threats, analyze patterns, and develop strategies in complex environments.
Foundry is aimed at large commercial enterprises and provides a wide-ranging set of tools for data integration, analysis, and visualization to enable data-driven decision making.

While both platforms share core analytics capabilities, they cater to distinctly different customer segments, each with its own unique set of needs and requirements.

Revenue Distribution

PLTR’s revenue is split into two primary sources: Government, mainly the US and other countries’ governments, and Commercial, which consists of non-government commercial enterprises. The government business contributes a slightly larger portion of revenue with 54% for fiscal 2023. However, the Commercial business is growing much more rapidly.

For the three months ended Sept 30, 2023, revenue from Commercial grew 35% and government 15% year-over-year.
Government: For the nine months ended September 30, 2023, the government sector generated $1,073.7 million, comprising 56% of overall revenue. Government is further divided into U.S. and International.
Commercial: For the same period, the commercial sector generated $848.7 million, comprising 44% of the overall revenue. Commercial sector is categorized into U.S. and international.

Revenue from existing customers has been higher in the commercial sector as its customer base has grown tremendously. In Q3, commercial revenue growth was 35%, while government revenue grew only 15%.

Trends in the Industry

Artificial Intelligence (AI): AI is becoming increasingly important, as evidenced by the use cases for Palantir, and also its potential for disrupting traditional methods of data analysis and decision making.
Data Security and Privacy: Companies are facing growing regulatory pressure regarding privacy and data protection. This increases the need for secure data processing solutions like those offered by Palantir.
Platformization: There’s a trend toward integration with different software systems and data sources, making companies with diverse platform integration capabilities more valuable.
Geopolitics: The increasing geopolitical uncertainty has created new use cases for Palantir’s software particularly with regards to their security and defense capabilities.
Commercial Growth: There’s an increasing awareness of data analytics in commercial organizations, resulting in demand growth in this sector.

Margins

Gross Profit: Palantir has historically enjoyed high gross profit margins, often around 75-80%, reflecting its software-based model.
Operating Income: PLTR’s operating margins have generally been lower, however, that has drastically changed. In the 3Q23, GAAP operating margin reached 10.2% up from 4.2% in 3Q22.
Income from operations: In 2021, the net loss was -$520 million, but was reduced to a gain of $136 million in 2022, and is looking at a net gain of $141 million for the first nine months of 2023.

Profitability has improved significantly over the recent past, as the company focuses on scaling its operations more efficiently, and gaining a higher recurring customer base.

Competitive Landscape

Palantir operates in a highly competitive market that includes:

Big Data Analytics Firms: Companies like Snowflake, Databricks, and Cloudera, offer cloud based solutions for data analytics and data management.
Traditional Software Vendors: Enterprise software giants such as SAP, Oracle, and Salesforce offer various data management, data storage, and CRM, often competing with portions of Palantir’s capabilities.
Consulting Firms: Firms such as Accenture, IBM, Deloitte, and McKinsey may provide strategic data-related advice that could also compete with the analysis function of Palantir.
Government Contractors: Lockheed Martin, General Dynamics, and Raytheon have their own divisions that are engaged in government contracts with advanced data collection and analysis needs.

What Makes Palantir Different

Palantir has a very unique approach in that it uses both AI and human intelligence in developing its platforms, giving it a high degree of sophistication and analytical prowess.

High Customization and Integration: Unlike many rivals, Palantir builds very customizable solutions that integrate well with customer environments.
Emphasis on Data Security and Privacy: Palantir has a focus on data security and privacy, especially with government clients, where information security is paramount.
Strong Government Relationships: The ability to secure large and long lasting government contracts is very hard, which gives the company a certain degree of stability.
Focus on Long Term Partnerships: They see the relationship with the client as an ongoing partnership instead of a vendor-client dynamic.
Proprietary Tools: Their platforms are based on a series of proprietary tools and algorithms, giving them an edge over commoditized cloud based solutions.

Financials

In Depth Look at Income Statements

Revenue: Palantir has shown consistent revenue growth since its IPO, with $1.91 billion in the past year compared to $1.54 billion in the previous year.
- The revenue is generally split between government and commercial customers, as mentioned above.
- Revenue is generated through a combination of term contracts, subscription-based contracts, and usage fees.
Cost of Revenue: Cost of revenue primarily entails the amortization of the underlying contracts of their software, and therefore doesn’t change greatly with revenue increase.
Operating Expenses: The company has had large operating expenses driven by R&D and Sales and Marketing that have historically hindered it from achieving consistent profitability. However, the expense structure is gradually changing as the company achieves better economies of scale. Sales and marketing have historically comprised the most of those, with R&D spending being a smaller component. However, R&D expenses are still quite high as the company continues to innovate and implement new ideas within their platforms.
Profitability: As discussed, the company is starting to show greater profitability. Gross and net profits are significantly higher in the current trailing year as compared to the previous. The trend is positive, and profitability is steadily increasing.

Analyzing Balance Sheets

Cash and Cash Equivalents: Palantir has consistently maintained a very solid cash balance (>$3B) which gives it significant financial flexibility and stability.
Debt: PLTR has a moderate level of debt, giving it a decent debt-equity ratio, and it should not prove problematic for them in the near future.
Equity: PLTR’s equity continues to increase driven by its increasing net income.

Palantir’s balance sheet can be characterized by high liquidity, a moderate degree of leverage, and steadily increasing equity.

About the Moat: Rating and Details

Based on the previously presented analysis, I am giving Palantir a moat rating of 2 / 5 with some justification:

The biggest strength is the stickiness of their government contracts and their unique, customizable platform.
Their highly defensible security protocols and ability to cater specifically to each client have ensured a high degree of retention from their clients.
They are starting to have similar stickiness in the commercial sector, and that should continue to be a positive driver going forward.
They have a strong presence in government sectors that are less likely to change their current solutions.
On the flip side, other established businesses offer the same services as them.
They are constantly facing innovation and disruption by other companies.
Many companies and individuals are starting to create open source solutions that may take away parts of the industry from closed proprietary systems like that of Palantir.
It is still unclear if they have a clear moat that will prove to be as resilient as those of other leaders.

I don’t see them having a very strong and defensible moat as of now, but given their specialized focus and high retention rates, they are likely to develop a better one in the coming years.

Risks That May Harm The Moat And The Business Resilience

Technological Change: As with any tech company, disruptive innovations may lead to the obsolescence of their platforms, or competition may offer better technologies that may take market share.
Competition: If competing firms begin to gain traction in either their core government markets or new commercial sector, then PLTR can have issues in terms of growth.
Reliance on Government Contracts: A large portion of revenue is dependent on a few key government contracts, which makes them vulnerable to changes in budget allocations, shifting government priorities, or changes in the political climate.
Reputation: High profile missteps, such as data breaches or misuse of data, may lead to reputational damage, which in turn may affect its government and private clients.
Economic Downturn: The current global macroeconomic turmoil can lead to decreased spending by both commercial enterprises and government agencies.
Difficult Sales Process: Palantir has a complex, highly customizable platform which will cause the sales process to take a very long time. There’s also a difficulty in acquiring clients as there is often a degree of mistrust with private companies using a software platform that also has government ties.
Difficulty to Scale: Their current business is heavily reliant on the implementation of each solution being handled by their own personnel rather than through self service models. If this does not change, then the company may face challenges in scaling operations and improving profit margins.
Profitability: While profitability has been greatly improving recently, they are not fully profitable. Further improvements and ability to maintain those improvements are a prerequisite for growth.

Understandability: 3 / 5

Palantir’s business model is relatively complex for the average investor, primarily due to the niche of their operations.

Their different softwares are confusing and difficult to understand for new investors.
Their long sales cycles and close contact with clients make their overall business approach relatively opaque.
However, the fundamental concepts of data analytics, and their business model is relatively easy to understand, so a 3 rating is appropriate.

Balance Sheet Health: 4 / 5

The balance sheet of PLTR is relatively strong:

It has maintained a good cash balance and low levels of debt.
The equity is slowly but surely rising.
However, given the fact that they are not profitable, the current position could change, which is why a perfect rating cannot be given.