Palantir: the Silicon Valley Villain?

Palantir has been at the forefront of software development for almost two decades now, with a substantial focus on big data analytics. Its revolutionary algorithm has made it one of the most sought-after security services in the world, with clients including the US Government and Morgan Stanley. Recently, in the midst of the COVID-19 pandemic, it announced that it had filed for an initial public offering. This decision has created to substantial segregation between investors, the reasons for which will be explored in this report.

Palantir has three main business projects: Gotham, which partners with the US Department of Defence to combat terrorism; Metropolis, which performs large data quantitative analysis for financial institutions; and Foundry, which provides sensitive data security for other types of corporate clients, such as pharmaceutical companies. Its unique selling point of analysing large data sets of public information has made it infamous in Silicon Valley, due to the unawareness of the fact that Palantir is collecting people’s data information. This has earned the company a controversial reputation, especially due to the large proportion of information that the US Government will have access to from Gotham.

Whereas this may be the public’s biggest worry, investors are concerned about the nature of the income statement. Even though revenues have been steadily increasing, the firm has been making heavy losses since its founding. Palantir has had a net loss of approximately 580 million USD in 2018 and 2019 and nearly 165 million USD in the first half of 2020. This is a significant issue, as it means that the firm will be prohibited from being listed as an S&P 500 company, limiting its potential. Furthermore, the large uncertainties in the US economy will influence Palantir because of the significant interconnection between the two. The upcoming general election is playing a large factor in this uncertainty, and investors are vigilant of Palantir’s response. This leads into the question of whether the growth is sustainable in the long run.

However, despite the controversies and lack of profitability, Palantir is still one of the most valuable firms in Silicon Valley, expected to raise 20 billion USD in its initial public offering. It has had a rapidly increasing contribution margin, increased from 21% in 2019 to 48% in the first half of 2020, showing increased profitability potential.

This has similarities to Tesla, an innovative firm which was also unprofitable before its floatation but had increasing revenues. As seen by recent events, Tesla has now managed to turn a profit and become one of the most valuable companies in the world. It is also possible for Palantir to achieve this in the medium run, once the operating costs fall from the technological restructuring, and when it gains more high-value clients. Currently, it only has 123 high-value clients, therefore needing to maximise its unique selling point in the ever-growing software market.

The IPO of Palantir will undoubtedly be an interesting event, due to the bullish market trends, and will be one of the largest public offerings this year. However, as tensions in the USA rise and the business structure Palantir possesses becomes volatile due to privacy concerns, it will be intriguing to see how investors and their animal spirits value it.

 

By Nandushan Balendran

Senior Editor: Billy Swann

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