Palantir Technologies Inc. (NYSE: PLTR) was an extremely attractive IPO last month because investors dramatically underestimated the financial leverage of its software platform. Now the opposite is true
Shares of the big data aggregator have risen 122% during the past 30 days. They surged 21% on Monday alone and investors believe Palantir is winning markets where it doesn’t even compete.
Palantir is a secretive company by design. It was founded in 2003 with seed money from the Central Intelligence Agency. The spy network wanted a set of software tools for analysts that rivalled the power and simplicity of Silicon Valley internet portals.
The tools Palantir software engineers built became Gotham, a sort of counter-terrorism operating system. The system allowed analysts to quickly find answers to complex questions without writing code or mastering statistical modelling.
Gotham is a Google-like search bar, but with access to mountains of government and business data like shipping logs and manifests, credit card records, customer lists and hundreds of other data points. They are integrated, matched and catalogued. More important, the platform lives in the cloud so analysts out in the field can pull up data on their laptops.
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Palantir owns this platform and it has become a vital analysis tool for the United States government and its allies. It’s a market that is getting bigger every day as more data and processes move online and state sponsored cyber threats grow.
This is where the confusion over Palantir’s potential begins.
The company claimed its total addressable market was $119 billion in the run-up to the September IPO. That number coincides with credible forecasts for artificial intelligence software spend in 2020.
To move beyond Gotham, Palantir developed two other big data platforms for predictive analytics. Metropolis is geared toward hedge fund clients and other businesses in financial services. Foundry platforms helps commercial customers better manage resource planning.
Since October, analysts have branded the Denver-based business an assassin of everything from cybersecurity visualization businesses like Splunk Inc. (SPLK), to no code data integrators such as Alteryx, Inc. (NYSE: AYX). Except that’s not really true … Palantir’s strength is in government and their financials prove it.
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During the third quarter, Palantir managers said that commercial revenue grew to $127 million, up 35% year-over-year. However, its core Gotham business saw sales surge 68%, to $163 million.
Long-term prospects look good for the company. Palantir is on a $1 billion sales run rate, with $1.8 billion of cash on hand. And adjusted operating income during Q3 swung from a loss of $92 million to a profit of $73 million.
These numbers should be met with some caution as, unfortunately, investors may be building unrealistic expectations for the growth of Metropolis and Foundry.
Shares trade 198.5 times forward earnings and 42 times sales. The market capitalization is $41.9 billion.
There is certainly a lot to like about this pick, but savvy investors should strongly consider waiting to buy shares into any weakness.
Best wishes,
Jon D. Markman
