By Peter Nurse and Yasin Ebrahim
Investing.com -- It’s taken some time in coming but Palantir Technologies Inc (NYSE:) has finally gone public, providing investors with an excellent opportunity to benefit from growth at a major player in the key area of data analysis.
As American management consultant Geoffrey Moore said, “without big data, you are blind and deaf and in the middle of a freeway.”
Following years of secrecy, given its ties with customers including spy, law enforcement and military agencies, Palantir’s foray into the public market has forced it to pull back the curtain on its operations and revealed fundamentals that have some scratching their hands.
Investing.com's Peter Nurse argues the bull case for the newly minted stock, while Yasin Ebrahim explains why it's a wait-and-see. This is .
The Bull Case
Palantir provides governments and corporations with the tools required to organize and glean insights from mounds of data, helping in areas as varied as detailing the spread of the novel coronavirus to tracking the activities of terrorists.
The U.S. data analytics firm made its debut on New York Stock Exchange debut on Wednesday, after years of speculation, via a direct listing and without the usual razzmatazz surrounding a traditional IPO.
It’s true the stock is trading below its $10 opening price, but this is still well above its reference price of $7.25 and things are likely to look very different when the Street starts its coverage.
The company has yet to make a profit, but surely that won't be long in coming given its losses in the first six months of 2020 totaled $164 million, down from $280 million the same period a year prior.
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Palantir anticipates 42% revenue growth in 2020 to about $1.06 billion, according to a filing earlier this week, with gross margins for the first half of this year at an impressive 73%. It also forecasts revenue growth of more than 30% next year.
Palantir was formed in 2003 in the wake of the 9-11 attacks, with its first major backer – the CIA’s venture arm, In-Q-Tel. It was one of the first companies in this space and thus has had a head start in developing the required technology.
While Palantir still analyzes large amounts of data for U.S. government defense and intelligence agencies -- contracts which tend to be frequently rolled over -- the private sector has become increasingly more important.
In fact, Palantir now says that a little more than half of its customers come from the private sector instead of governments. And there will undoubtedly be increasing demand from companies given the massive amounts of data they generate.
"Broadly speaking Covid has been a tailwind for our business," Chief Operating Officer Shyam Sankar said in a recent interview. "We started 83 new engagements with customers in the first three weeks of Covid without getting on a plane."
The coronavirus pandemic has forced companies to revisit how they do business, and the Covid era doesn’t look like ending anytime soon.
The Bear Case
Palantir has never made a profit. Customer concentration is a real risk. Beyond the fundamentals, meanwhile, questions surrounding its approach to data mining and privacy could pose operational headwinds now that it is in the public eye.
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While unprofitable unicorns – companies valued at more than $1 billion – making their public debut is nothing new, the company is far from a new kid on the tech block having been around since 2003. “They’re massively unprofitable and they’ve never been able to figure it out,” New York University business professor Scott Galloway.
It took Google three years to turn a profit, and Amazon seven.
Palantir’s answer to questions surrounding its bottom line has been to wean itself off the teat of government clients, who make up nearly half of its revenue, toward commercial clients. Just under half its 2019 revenues were from government agencies, while three clients accounted for more a third of revenues in the first half of 2020.
A single commercial customer made up 14% of revenue in the first half of 2020, while another commercial customer represented 10% of revenue. While just one government customer accounted for 11% of revenue in the first half of 2020, the company reported in its S-1 filing.
The concentration of customers will place the Palantir’s ability to scale its commercial business under the spotlight, but its reputation for secrecy and concerns surrounding its approach to data mining and privacy controls may prove to be operational headwinds, potentially pushing its path to profitability further out for a while a longer.
Ahead of Palantir’s listing, Amnesty International flagged the company’s inability to protect human rights, citing inadequate due diligence into who it is working for.
“We need them [Palantir] to conduct human rights due diligence, and we just don’t have any evidence that they’ve done this,” said Amnesty’s Denise Bell. “We’ve asked for it, and they didn’t supply it.”
In the current political climate when tech firms are on trial over alleged privacy and antitrust violations, questionable practices to handling data have already proven to have costly consequences.
In the recent past, both Alphabet (NASDAQ:) Inc Class C (NASDAQ:) and Amazon.com Inc (NASDAQ:) have had to cut ties with government agencies after employees threatened to walk out over concerns the projects posed potential human rights violation.
Palantir employees have already shown they’re of a similar ilk. In 2018, more than 200 employees signed a letter to CEO Alex Karp, citing concerns over a partnership with Immigration and Customs Enforcement, the Washington Post reported.
With the shortage of artificial engineers, which represents an important part of Palantir’s revenue from consulting services, the company cannot afford to run foul of its employees’ expectations.
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