When companies create vast amounts of data, much of the data they produce is unstructured -- meaning the data cannot fit neatly onto a spreadsheet. Nearly 90% of all data created is unstructured, and the amount of that data type has grown at 60% annually according to Bernard Marr & Co.
Because this kind of data can be difficult to analyze, it's harder for businesses to fully understand and integrate it into their actions and operations. Governments felt the same magnified problem on their battlefields. Then, along came Palantir (PLTR 3.21%), a software company that provided capabilities for the U.S. government and its allies. Palantir's platform, Gotham, helps military and intelligence agencies analyze data and identify patterns hidden deep within datasets. There is no doubt that this company is doing important things, but is it worth a purchase by the average investor?
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Building strong relationships
Palantir has become known as a safe, secure, and powerful analytics platform among the U.S. government and its allies. Having various sectors of the U.S. government like the Army and CIA as customers is a powerful testament to the security and reliability of Palantir. Palantir was even rumored to help capture Osama Bin Laden in 2011. This achievement helped in its efforts to move into the private sector.
For a long time, Palantir worked exclusively for the government, and it only recently expanded its offering -- Foundry -- to the private sector in 2016. However, Palantir is already seeing tons of success in this shift. The company has grown its revenue from the commercial sector by 103% year over year, and the company's customer count has doubled since the start of the year and grew 46% sequentially.
This rapid adoption from the commercial sector is important because Palantir's software is extremely sticky and it is very expensive to obtain customers. The company spent over $150 million in sales and marketing in the third quarter of 2021, representing almost 40% of its revenue. As a result, Palantir brought in 54 deals. While 54 deals don't seem like a lot, 51 of those deals are worth $5 million or more, and 18 of those are worth more than $10 million.
With deals this expensive, once you become a customer, it is probable that you are going to stay a customer -- that's stickiness. Not only because of the price but also because Palantir's services can quickly become an integral part that businesses rely on. Therefore, this rapid adoption from the commercial sector is a great sign that Palantir will continue to succeed in this space. This is crucial to the company, since Palantir's customer concentration currently shows it's still massively reliant on the government for business.
The company only has a total of 203 customers, and over half of its revenue comes from government clients. This likely comes from heavy U.S. government concentration from various government agencies While no exact concentration figures from the total U.S. government are given, 10% of revenue in 2020 came from one government branch.
The key risks
Aside from the immense reliance on the government, there are other risks associated with Palantir's business. Especially with the government, security is a major concern. While Palantir has never had any security breaches yet, all it takes is one for the relationship it has built with a major government customer to dissipate. Palantir prides itself on its security and ability to hold sensitive information, and any failure to do so could wreck the company.
A second risk is the company's path to profitability.
| Q3 2021 | Q3 2020 | Change | |
|---|---|---|---|
| Net Loss | $102 million | $853 million | (88%) |
| Net Loss as a Percentage of Revenue | 26% | 295% | N/A |
Source: Palantir Company Filings.
The company's losses haven't been pretty, but they have dramatically improved from the year-ago quarter. This has been helped in part by Palantir's success in the commercial sector, and while it has been expensive to market and gain customers in this part of the industry, the company has been extremely successful so far. If the company can continue to attract commercial customers, this net loss will likely improve substantially. If this cannot happen, however, the company could fail to become profitable and hurt investors for the long term.
Is it a buy?
Palantir is not a stock for every investor, as it still carries some risk. However, the thesis behind this company relies on its ability to integrate itself into the commercial sector, and its superior product is, so far, doing just that. The company is not cheap while trading at 25 times sales, but for investors who have a diversified portfolio that allows them to make a few risky bets, this company has the potential to make the shortlist.
I own Palantir for two reasons. First, I love what it is doing for the world. Palantir's technology allows government entities to analyze and notice things they have never been able to before, and I believe that is making me -- an American citizen -- safer. Second, I love technology. Both Gotham and Foundry are innovative solutions that use artificial intelligence to unlock a whole new world of data -- which is something that hasn't been done at scale before, and that is fascinating. If these two things matter to you, then you might want to look into putting Palantir in a diversified portfolio. However, if you are an investor who cannot take on as much risk, this company might not be for you.
