One of the more high-profile public listings of 2020 will be that of Palantir Technologies, a data analysis company founded by PayPal (NASDAQ:PYPL) alumni Peter Thiel, Nathan Gettings, and Joe Lonsdale.
A filing with the Securities and Exchange Commission (SEC) on Friday revealed that the company expects to begin trading on the New York Stock Exchange (NYSE) on Wednesday, using the ticker "PLTR." The NYSE estimates that Palantir's IPO will price at $7.25 per share, for an implied valuation of $15.7 billion.
Because of the name recognition of its founders and the secretive nature of the company's work, Palantir is getting a lot of attention from investors and plenty of ink in the press. That, coupled with the company's impressive financial picture, may result in a successful launch that could rival that of Snowflake (NYSE:SNOW), which had a blockbuster debut earlier this month.
Data mining for governments, law enforcement, and business
Palantir's debut may be as controversial as it is noteworthy, as the company gathers data from both public and private databases and analyzes the information using sophisticated algorithms and artificial intelligence. The system sifts through data to identify patterns in information that might otherwise remain hidden. Due to its work with government agencies and law enforcement, the data collected can include addresses, credit card transactions, biometrics, police reports, criminal records, vehicle information, photos, and phone records.
The high-tech data mining software is employed by more than a dozen U.S. government agencies including the CIA, which was also an early investor. Other prominent government organizations that have used Palantir's software include the Department of Defense, FBI, and the National Security Agency. The company was also enlisted by the Centers for Disease Control and Prevention to help track the spread of the coronavirus pandemic.
As Palantir continues to expand into the commercial sector, government contracts are becoming less important to the company's overall business, with 53% of its revenue now coming from commercial businesses.
Marching to the beat of a different drummer
Palantir executives decided to forego the initial public offering (IPO) -- the traditional route to public trading -- and instead opted for a direct public offering (DPO).
In an IPO, a company hires investment banks to handle the offering and to act as an intermediary between the company and institutional investors and assist in determining what they would be willing to pay for the shares, helping to set the stock price. At the same time, management embarks on what is called the "road show," a series of financial presentations to the investment community outlining the company's business model, operating history, and future opportunities, as well as its target market. This process helps drum up interest and demand for the stock in advance of its debut.
A company choosing a DPO typically doesn't need to raise capital to fund its ongoing operations. Another benefit of this type of listing is that it allows early investors and company insiders to sell shares on the first day of trading, without being bound by the typical lockup period. The DPO minimizes the duties of the investment bankers, with the company taking on many of the tasks itself, helping save millions of dollars in the process, as an IPO can typically cost a company between 3.5% to 7% of the gross IPO proceeds.
A promising financial picture
In 2019, Palantir's revenue of $743 million grew 25% year over year, but the company also generated a net loss of $580 million, virtually unchanged from its loss in 2018. The company's financial picture improved dramatically for the first half of 2020, with revenue growth that accelerated to $481 million, up 49%, while its loss of $162 million improved 42% compared to the prior-year period.
Palantir's margins are also improving, helping boost its profitability. The company's gross profit margin was 67% last year and has improved to 72% so far in 2020. Palantir currently has a contract backlog of $1.2 billion, up 74% compared to December 2018. In addition, Palantir has also recorded $2.6 billion in government contracts that have yet to be funded, which can't yet be included in its financials.
Since 2009, the average revenue per customer has increased at a compound annual growth rate of 30%, while revenue from its top 20 customers has grown by 36%. Additionally, Palantir's customer contracts are typically multi-year agreements. As of June 30, the average contract had 3.5 years remaining.
While companies are forbidden from providing a forecast prior to an IPO, the rules aren't so strict for a DPO, giving us further insight into Palantir's expectations for the future. The company is anticipating revenue of about $1.06 billion for 2020, an increase of 42% year over year, resulting in adjusted operating income of about $121 million, up about 12%.
A flurry of interest
Much like Snowflake did earlier this month, Palantir is generating significant interest from investors, which could result in a blockbuster first day of trading. Even after twice raising its issue price prior to its debut, Snowflake stock still vaulted out of the gate, more than doubling on its first day of trading.
The amount of interest being generated by Palantir's debut could potentially drive similar results.
Editor's Note: This article has been updated with information on the expected pricing for Palantir's IPO.