The past few years have seen no shortage of difficulties, from the pandemic to rampant inflation to Putin's invasion of Ukraine and China's saber-rattling over Taiwan, just to name a few. 2022's big market decline has only added to the sense of unease.
But in the investing world, every difficulty presents an opportunity for certain problem-solving companies to benefit. Big-data software company Palantir (PLTR 1.87%) may be the company that benefits the most from these huge global problems.
Palantir went public in 2020, and now its stock is at all-time lows. But does the company's enviable position and low stock price make it a buy today?
NASDAQ: PLTR
Key Data Points
From serving the CIA to cataloging sports memorabilia
Palantir was founded as a way to gather disparate data and find patterns within huge data sets, borne out of the global "War on Terror." Palantir's first customers were in the United States intelligence community, and other government agencies followed.
Besides fighting terrorism, early projects for Palantir included preventing fraud in disbursements of the 2009 stimulus bill. When the 2020 Covid-19 outbreak occurred, Palantir's software helped link up data from disparate healthcare systems to provide personal-protective gear where needed, track available ICU beds, and disburse vaccines. This year, Palantir's software has been used to help Ukraine resist Russia's invasion and by NATO nations to aid in the resulting refugee crisis.
As of today, Palantir has three main platforms: Gotham, primarily used by the government and military organizations; Foundry, primarily used by enterprises; and Apollo, a platform layer that helps entities run Palantir or other software securely in whatever environment a customer wants.
Enterprises are catching on and coming on strong
After a couple of strong years of growth, the government sector has slowed for Palantir, up just 13% last quarter, due to the inconsistency of large government contracts after several high-growth years during the pandemic. However, Palantir's commercial segment is catching on, up over 46% last quarter and nearly reaching the size of the government segment. The U.S. commercial business grew an even larger 120%, and U.S. commercial customers more than tripled year over year.
CEO Alex Karp has said there's no love lost between customers and Palantir, as many enterprises have tried to build their own big-data platforms or piece together a platform through other large software providers. However, Karp noted on the recent conference call with analysts that several commercial customers have returned to Palantir after not finding success:
[O]ne of the most important things driving our software, but especially in commercial is, is that people have tried and tried and tried to build our product. We have a number of customers that we've been able to bring on board this year that, quite frankly, didn't like us. And it's like but the product brought them back. And why did the product bring them back? Because the product is actually delivering value that is otherwise not available.
One example was recently profiled by Citi utility analyst Ryan Levine, who wrote about how Edison International recently implemented Palantir's technology to help reduce wildfires. Palantir's foundry can make sense of numerous factors, from heat, moisture, and wind, as well as satellite imagery to help California utilities during wildfire season. Increased ability to mitigate fire damage means more uptime and less potential liability, and Levine upgraded Edison to a buy, as a result.
Palantir is also finding customers in industries one wouldn't think would require CIA-level data insights. Last month, the company won a contract with Beckett Collectibles, creating a new back end to digitize and enable real-time data for Beckett's vast troves of sports cards, comics, and other collectible assets. "A backend rebuild that might have taken four to six months took only six weeks thanks to Palantir Foundry," said Beckett's CEO Kunal Chopra.
But is the stock a buy?
Despite trading near all-time lows as a public company, Palantir doesn't look "cheap" by conventional metrics, at nine times sales, while still losing hundreds of millions on a GAAP basis. However, there are some promising signs on the path to profitability.
First, its operating losses are coming down significantly. Last quarter, Palantir's operating loss totaled $41 million, but that was down from $146 million a year ago.
I had previously been wary of the amount of stock-based compensation Palantir pays its employees, but that has decreased significantly this year, down 37%, compared with last-year's quarter. Likely, the stock comp was abnormally high last year after accelerated awards following Palantir's IPO.
In addition, Palantir has lots of cash, to the tune of $2.4 billion, and no debt. That cash position accounts for about 15% of Palantir's market cap. Palantir also held about $99 million in marketable securities, as the company sometimes invests in early-stage growth companies that use its software. The value of those securities has declined significantly over the past year with the sell-off in technology stocks, but if one or more of these small customers turns into a big winner, Palantir should benefit.
Finally, Palantir may not be earning as much as it should at the moment because its business model is a bit different from traditional software companies. Palantir embeds employees deep within prospective customers' operations in order to configure Gotham or Foundry, often spending lots of time and money before earning any revenue. Only when customers graduate to scale Palantir's software after proof-of-concept does Palantir earn material revenues.
So Palantir's growth is uneven. Alex Karp actually mentioned on the conference call that while the company's government business has compounded at a 35% growth rate over the past 10 years, there were some years with no or even negative growth in that time.
That's partly why Palantir took so long to go public, as it may be hard for public investors to accept such uneven returns. And while Palantir may be more reasonably priced now with encouraging trends in commercial, it's still possible for it to get even cheaper in this fearful market.
However, given its position as the go-to solution for very difficult global problems, and given that its losses are coming down, it's definitely a name to watch this autumn. Younger, growth-oriented investors with longer time horizons should definitely follow Palantir's development and put it on their watchlists.
