Palantir Technologies, the data-mining firm that serves the U.S. government and large enterprise clients, plans to go public in late September. The 17-year-old company was valued at $20 billion after its last funding round, and it will sell some of its existing shares via a direct listing in which no new funds are raised and no new shares are issued.
Let's discuss five things investors should know about this upcoming offering.
1. It's steeped in controversy
Palantir was co-founded by Peter Thiel, the Silicon Valley billionaire who previously co-founded PayPal, along with Thiel's Stanford classmate Alex Karp and three other investors. Thiel is currently the company's chairman and Karp is its CEO.
Palantir is controversial for two reasons. First, it generates over half its revenue from secretive data contracts for government agencies like the CIA, which was also an early investor, along with the Department of Defense and Immigration and Customs Enforcement. Palantir's work with ICE, in which it helped the government identify and deport undocumented immigrants over the past six years, notably sparked employee protests last year. Second, Thiel is an outspoken supporter of President Donald Trump and a combative critic of the press.
Palantir admits its controversies will persist in its latest S-1 filing, which cites "negative publicity or negative private statements" regarding its platform as key risk factors. It also boldly declares its ultimate goal is to become the "default operating system" of the U.S. government.
2. Its revenue growth is accelerating
Palantir's revenue rose 25% to $742.6 million last year. In the first half of 2020, its revenue grew 49% year-over-year to $481.2 million.
That acceleration suggests Palantir's business model is well-insulated from macro headwinds like the U.S.-China trade war and COVID-19, and it arguably benefits from a growing appetite for organizing data in uncertain times.
That isn't surprising, since Palantir was initially pitched to the U.S. government as a tool which could have prevented the 9/11 attacks by pulling personal data from disparate sources and analyzing it across a single platform. Hence its name, "Palantir" -- which is derived from the network of magical communication orbs in J.R.R. Tolkien's The Lord of the Rings.
3. But it still isn't profitable
Palantir has never turned a profit, and its net loss only narrowed slightly from $580.0 million in 2018 to $579.6 million in 2019. But in the first half of 2020, its net loss narrowed year-over-year from $280.5 million to $164.7 million. Excluding stock-based compensation, it generated a net profit of $17.2 million -- so it could generate its first non-GAAP profit this year.
Palantir was sitting on $1.5 billion in cash and equivalents at the end of June, which indicates it has time to gradually narrow its losses. That cushion also explains why it isn't filing a traditional IPO: It doesn't need to raise cash, and a direct listing would boost the value of its existing shares without diluting its current shareholders.
4. Investors won't have significant voting rights
In the latest revision of its S-1 filing, Palantir states its Class A common shares, which will be offered in the direct listing, will only yield a combined 3.4% voting power in the company.
Palantir's Class F shares, which will only be held by its three founders, will control just under 50% of the voting power. The Class B shares, which are mainly issued to employees, have 10 times the voting power of the Class A shares.
Palantir's founders are also reserving the right to add other classes of non-founder shares to their overall position. In the filing's stipulated limits, the founders could theoretically boost their combined voting stake to over 68%.
5. It's dependent on public cloud platforms
Palantir's two main data mining platforms -- "Gotham" for U.S. government agencies and "Foundry" for enterprise clients -- both run on Amazon (NASDAQ:AMZN) Web Services (AWS), Microsoft's (NASDAQ:MSFT) Azure, and other public cloud services.
However, Amazon and Microsoft have already faced protests, from both employees and external groups, over Palantir's ties with ICE and other government agencies. Back in 2018, 450 AWS employees signed a letter to CEO Jeff Bezos asking for Palantir to be removed from the platform. Bezos didn't comply, but that pressure could still mount in the future.
Amazon and Microsoft also both hold cloud contracts with major U.S. government agencies. Both tech giants could eventually launch similar tools on their cloud platforms to disrupt the company's plan to build the "default" OS of the U.S. government.
The key takeaways
It's been a banner year for tech IPOs, and Palantir will likely join Snowflake and Jfrog as one of the market's hottest new stocks. However, Palantir is a much more controversial company, and it remains to be seen if those concerns will dampen investors' appetite for its direct offering.