What Does Palantir Actually Do?
This week, we take a look at Palantir, and what they actually do. Please consider this article as speculation since some of my personal thoughts are embedded in this article.
I am personally an owner of Palantir shares.
Kathy Wood is the founder of ARK Invest and has seemingly risen to legendary investor status in the past year. Many people may criticize her investing methods, but you can’t dispute that her fund has performed incredibly well over the years.
Since inception, her fund has seen returns of 36.42% annually versus the S&P 500's 13.04%. This has caused her to become idolized by investors in the market today and now investors seem to pay attention to her every move whether that is, to follow her investments or criticize them.
Recently, Kathy Wood has been betting huge on Palantir, which seems to be a controversial stock in the market right now.
1. Because they have a pretty strong stance on who they do business with. And;
2. Because of the valuation.
Despite these potential drawbacks, Kathy Wood again has been adding to her Palantir position. On Friday, February 26th 2021, she increased her position from $124 million to $183 million worth of Palantir shares. This also increased her position in Palantir by roughly 40%.
On this one day alone, Palantir is currently down over 40% from its highs. So I think it's safe to say that Kathy is buying the dip and that her conviction on the stock is incredibly strong.
In this article however, let’s understand what Palantir actually does and how they help their clients.
Palantir currently has two main products and these are Foundry and Gotham. Foundry is a platform that helps businesses and organizations make better decisions. Gotham is specifically designed for the battlefield and it's meant to help the military make better decisions as well.
These two products have a few different uses but their main goal is the same and that is to help the user make better decisions and adapt to their current situations.
They can also use Palantir to see multiple different outcomes of the decisions that they are about to make. This essentially allows both businesses and the military to see the outcomes of the decisions that they are going to make before they even make them. Which is incredibly powerful and to understand Palantir a little bit more deeply, let's go over some of the key points from Palantirs’ demo day. So what is Foundry? On their demo day, they say
“Foundry is a first class data integration and management platform, a comprehensive suite of analytical tools and an operational platform of applications for business users. But at its core, we believe Foundry is the central decision support infrastructure for any organization. We built a software framework that translates data and models into knowledge that human operators can use to make better decisions. This ontology, the representation or the digital twin of an organization, provides a common interface for all downstream workflows from search and analysis to operational applications like supply chain optimization. It is also a two-way interface between an organization's digital assets and its real-world operations allowing teams to feed their unique insights back into a common understanding of the business.
Importantly, this ontology is dynamic and it changes over time; expanding, as digital transformation starts to include more parts of an organization and changing as the organizations themselves evolve. Traditional ERP systems and inflexible data models cannot handle these inevitable changes in order to make even better decisions. Your team needs more than just data. Oftentimes operators rely on models to help them understand the potential impacts of decisions before they make them.
These models can be as complex as deep learning and artificial intelligence or as simple as logic like adherence to standards often used by executives. Once again, Foundry's ontology is the connective tissue by mapping models to that ontology. We create a system-wide simulation engine that powers what-if analyses that were previously impossible. Users at every level of the organization from strategic to operational can understand the potential outcomes and side effects of a decision before they execute on that decision. What this creates is an extremely powerful infrastructure that enables organizations to treat their operations like code. Changes can be staged and tested before they are applied.”
From this first segment we learned that Palantir's Foundry system basically creates a digital twin of an organization. This digital twin grows and changes with the business and it's essentially just a direct replica of the business just in digital form. This digital twin also has the capability to create hypothetical situations for the organization. They can use Foundry to see the potential outcomes of their decisions before they even make them. This allows the organization to see the best possible outcomes of the decisions that they are going to make before they even make them based totally off of AI.
This is akin to being able to see into the future and then being able to see how your decisions are going to affect the outcome and then being able to cipher through all of those and choose the best outcome possible. This is incredibly powerful technology and could shape the business world in the future.
But now, let's move on to the second segment of Palantir's demo day and just listen to what they have to say: “it is notoriously difficult to understand cause and effect in a supply chain; when automation fails, due to disruptions or simply because the status quo has changed. Companies have a very difficult time adapting. As a result, delayed orders or lost opportunities like excess inventory are commonplace. With the seasonal demand model and the production model, we can quickly traverse a complex value chain and ask questions like, if a supplier delivers only 50% of a raw material, what is the impact on my on-time delivery of finished goods? Which of my customers are most impacted? Because the models are chained together, through real-world mapping. I can easily understand the complexities of my entire supply chain from upstream suppliers to downstream customers and everything in between including the plants and the distribution center nodes. As a result, everyone can understand and anticipate the side effects of their decisions allowing for unprecedented collaboration and universally optimal decision making. [We] can simulate the interactions of all of the models and the impact on the supply chain into the future. We can see some of the nodes turn red, the plants and distribution centers you see on the map alerting us to potential problems in our supply chain such as low inventory or an increase in unexpected demand or anything else.”
We learned that Foundry can create hypotheticals in the supply chain as well as find weak points or flaws. It can also simulate a different future scenario which alerts problems that might come up like lack of future inventory or a supply constraint that no one sees coming yet. This means that by using Foundry, many different organizations can address future problems before they even become a reality.
Benjamin Franklin has a quote that says,
“An ounce of prevention is worth a pound of cure”
- Benjamin Franklin
Foundry seems like it can be that ounce of prevention. This technology is incredibly useful for businesses if it can work as they suggest. With these two fascists of the business we can understand what Palantir’s technology does, and now we can try and understand what Palintir sees this business going.
Bianca Rahill-Marier (who is the Head of Foundry Product): is quoted on the demo day in saying “I want to talk a little bit about the future of Foundry and how we're going to increase Foundry's impact. We think about doing that in three ways;
1. Reaching more customers through our use case catalog and modular deployment options.
2. Reaching more users that Foundry can power every critical decision made in and across institutions. And this means getting Foundry into the hands of every user who needs it through things like a new mobile offering and enabling users across organizations to collaborate so that they can work together to solve hard problems that can't be solved alone like the ongoing pandemic and climate change and third;
3. We're going to build on what you saw in the demo and innovate in our approach to how AI is applied to operations. We imagine a world where every decision made is informed by the best data possible and decision makers leverage simulation to fully understand the wanted and unwanted consequences of their actions within complex connected systems.
Fundamentally though, this isn't about any specific optimization algorithm but about how Foundry connects optimization with actual operations. We believe that by combining the software's ability to fully explore decision space with the human operators’ ability to understand unmodeled constraints and information, we enable organizations to rapidly adapt to changing environments and consistently be adjusting towards optimality in every decision that they make.
This can mean anything from identifying the optimal price of cell inventory, identifying wind turbines positioning to maximize electricity generation or plotting shipping routes that will maximize revenue over the course of years.”
Palintir’s main goal right now is to increase their customer base. They want to do this by introducing a mobile app that has foundry on it; which would essentially allow many different people in the organization to use Foundry if they're not near an easily accessible computer. They also want to continue investing aggressively into R&D, so that they can continue perfecting Foundry and making it better and better.
This suggests that a large portion of Palantir's profits are going to be reinvested into R&D and growing the customer base. Palantir envisions a future where every business is using AI to make the best decisions possible and get the best outcomes of their decisions.
The Palintir technology is adaptable which means that it can be used in almost any business to help them reach maximum profitability. Let’s also try and understand what the COO himself has to say about Palantir and what he thinks about this company.
“You know we are not just a data platform, we're not analytics; we are trying to make our customers better, not just smarter. Analytics give you insights. How do you turn these insights into decisions? How do you turn those decisions into alpha? We accomplish this by building and enabling connected organizations, connected companies, connected departments, connected institutions.
We think of an enterprise as the sum of all decisions that the enterprise makes. So our software functions in a way that provides the integration between all these various silos of decision making. The end result of this is whereas; most software makes you more similar to your competitors. We make you more different, we make you more differentiated and you can see that, in how our software-defined data integration really automates away the beta and enables you to start wielding your ontology for alpha generation in a matter of few hours and you can see that in how the digital twin enables you to simulate and manage unexpected shocks to your supply chain. We are at the point now where you can really see how upgrading the product, upgrading Foundry, upgrading Gotham, upgrades the customers business.
You know upgrading Gotham upgrades your weapon system. Upgrading Foundry upgrades your company. It does this by connecting your company; it does this by delivering this crucial leverage to connect strategy and operations immediately and I think this is just profoundly powerful and it's a result of over 15 years of hard work and focus on alpha generation. You know we didn't just stop at beta, we're not just making you more efficient, we're actually making you more competitive and with every update and every release of the software, we're making you more and more competitive.”
This suggests that Palantir works with their clients to make their clients better. Whenever Palantir doesn't upgrade to Foundry or Gotham, it makes the organizations that use these products better as well. They're essentially upgrading the organization whenever they upgrade their own software. Palantir helps simulate unexpected shocks and future outcomes so organizations of all sorts can make the best decisions possible.
Lastly, utilizing the digital twin makes businesses much more competitive and this is incredibly powerful.
Gotham is like Foundry but more so for military applications. It is designed to give potential outcomes of decisions to the military so our forces can have the best odds of success.
The massive opportunity lies in the commercial sector, however, the fact that the U.S. Government is using Gotham, is a validation of Palantir's technology.
So now that we have learned more about Palantir and what they actually do,is their technology actually working? Are the companies actually using this technology and seeing benefits from it? Or is all of what they're saying just a pipe dream right now? Because if businesses are already reaping the benefit of working with Palantir, then they have a great runway for growth. All they need to do is implement their software into more businesses. If this is the case, then Palantir has essentially proved their concept and now all they need to do is expand it. So let's now take a look at Palantir's investor presentation and see what their numbers have to say.
The first slide talks about revenue growth.
From their presentation it says “our business grew significantly in 2020”. It also says that
They saw 47% growth to the revenue and that
They signed 21 deals in Q4, each worth more than $5 million or more. Again, this is 21 deals signed in Q4 alone. This adds up to over $165 million worth of new deals in just three months. Also signing 21 deals in just three months means that Palantir is signing more than one deal a week.
Moving though the second slide talks about their commercial business. Which says,
In 2020, we generated 107% revenue growth from our U.S. commercial customers.
It also says that their commercial customers made up about 44% of the revenue which brought in $482 million in total revenue for the year of 2020.
Commercial revenue is growing significantly. About 107% growth year over year is incredible.
In Q4 2020, we signed several large deals across automotive, energy, healthcare, insurance, mining, shipping and more.
This confirms the speculation that Palantir's technology can be used in multiple different industries. It's not just like you can use this in the mining or oil industry. Every single business can use Palantirs technology in some way.
This next slide says, Palantir launched a partnership with IBM to integrate with IBM cloud pack for data and IBM's 2,500 person sales force. This partnership essentially utilizes IBM's cloud and Palantirs Foundry to work together.
On this next slide, it talks about Palantir signing a deal with PG&E. This says,
Palantir signed a multi-year, multi-million dollar contract with PG&E to create a digital twin for enhanced safety and grid reliability.
PG&E collects 8-10 billion data points every day, and is using Foundry to build a digital twin of its entire network
Actively improving electric operations and asset management
Enhancing safety and grid reliability
Working towards supporting asset risk and outage investigations
Foundry essentially creates digital twins of businesses and then they can use these digital twins to simulate different outcomes of the decisions that businesses are thinking about making. PG&E is now developing their digital twin so that they can enhance the safety and their grid reliability, which suggests that this is going to increase PG&E's operating efficiency greatly.
On the next slide, it says;
Expanded our work with BP to power Net Zero Emissions corporate strategy.
o Generated more than $1 billion of value in 2020 through a digital twin and simulation system in Foundry that recreates every drop of oil across bp plants in digital form
o Optimizing wind farms, electrical charging networks, solar power generation, and other aspects of the energy giant's net zero emission targets.
So Palantir has created a digital twin of BP, and BP is one of the largest energy companies on the entire planet and they're partnering with Palantir to create a digital twin and use Palantir’s technology to optimize their business.
If we go and take a look at the actual press release of this partnership between Palantir and BP, it has this to say;
“Palantir and BP have partnered since 2014, and Palantir’s software has been a key accelerant in BP's digital transformation. BP has now committed to using Palantir's Foundry software for five more years and apply it to new areas of the business to further accelerate BP’s strategic digitization objectives and help support delivery of its ambitious energy transition goals.”
Palantir and BP have been in partnership since 2014 and now BP has committed to using Palantir's Foundry software for five more years and to start applying it to new areas of their business. The press release says; “BP's digital twin applications powered by Palantir, have already delivered significant value and enhancements in hydrocarbon-based workflows. Now, there are opportunities to apply these applications to accelerate BP's new ambition, optimizing wind farms, electric charging networks, solar generation and supporting the achievement of other aspects of BP's net zero aims.”
BP is now looking to apply Palantir's Foundry software to optimize their wind farms, electric charging networks, solar generation, and all of it. This brings Palantir software into the EV space, the solar space, wind farms, charging networks and all of it, with Palantir's name on it.
Looking into Palantir's Government business. They say;
In 2020, we generated 77% revenue growth from our government customers. The first thing that I’m noticing here is that the revenue growth from government contracts was not as much as their commercial business side.
Note that their commercial business grew by 107%. Whereas, their government business is now only growing by 77%.
Palantir's commercial segment of their business is actually growing more rapidly right now than their government section. Currently, Palantir is still getting 56% of their total revenue from government contracts, which generated about $610 million in revenue for the year of 2020. If we consider Palantir’s contracts with the government, we can see from this slide that
One of four SaaS in DoD Impact Level 5 (“IL-5”) for Mission Critical Information National Security Systems
Blazing the trail to become the first SaaS in DoD Impact Level 6 (“IL-6”) for Classified Secret National Security Systems.
Palantir is in fact only one of four companies with Impact Level 5 clearance. The DoD similar companies with Impact Level 4 clearance are Salesforce and Oracle and companies with Impact Level 2 clearance are Snowflake and Google. So Palantir software looks like it's much more trusted with the government agencies.
Also the second point means they're the top tier SaaS and that the U.S. government singles them out as the best and most trusted with sensitive information.
Let's take a look at some of their recent government contracts:
Signed a two-year $31 million contract with NHS England - throughout which the UK vaccine program has ordered, allocated, tracked and delivered all vaccines through Foundry
The UK is currently in a crisis more so than many other countries in the world and while they're dealing with this crisis and trying to roll out their vaccine program. They are essentially trusting Palantir's Foundry system to guide them on their vaccine rollout.
Also, the UK vaccine program is currently being praised around the world right now and people are saying that the UK has managed to master their vaccine rollout. Remember the UK vaccine program is currently ordering, allocating, tracking and delivering all of the vaccines through Palantir's Foundry program.
Let's talk about the revenue figures;
In 2020, we generated 47% annual revenue growth; revenue from our top 20 customers is increasing.
o In 2019, the revenue from the top 20 customers was $495 million
o In 2020, this grew all the way up to $663 million.
What this ultimately means is that their top 20 customers are actually bringing in more business for Palantir and this is kind of the bp deal that we saw earlier, where bp is seeing so much value added to their business from Palantir that they now want to expand the Palantir Foundry system to multiple different areas of bp's overall operations and business. This is what Palantir is seeing throughout many of their different top 20 customers and this is why their revenue from their top 20 customers is in fact increasing. As stated in the press-conference:
“Customer concentration of our top 20 customers as a percent of total revenue is decreasing in 2019. 67% of Palantir's total revenue was brought in from their top 20 clients and in 2020, this dropped down to 61%.”
This means that their existing clients like BP want more of their services which increase their revenue from that one customer. However, at the same time they are signing on so many more clients that these revenue increases in their top 20 customers are taking up less and less of the company's overall revenue income. Which essentially just means that Palantir's revenue is becoming risked as the company grows and signs on more contracts.
Our customers include 8 of the Fortune 100, 12 of the Global 100 and 24 of the Global 300. Which suggests two different things;
1. That Palantir is working with some of the top companies around the entire world right now
2. Palantir still has many more global giant companies to expand to and work with.
They're working with 8 of the Fortune 100 companies so they still have a ton of room to potentially expand. Finally, let’s talk about their revenue projections;
Long-term orientation
Five-year outlook.
o They are projecting revenue of over $4 billion or more in 2025.
This is where the valuation of the business comes into question.
Taking a look at Palantir's market valuation today in 2021, it is $44.6 billion. This ultimately means that if they can go on to produce about $4 billion in revenue by 2025, then it puts them at a Price-to-Sales (P/S) of over $11 today based on 2025 revenue. Which essentially means that even if Palantir were generating $4 billion in revenue right now, it would still be a very expensive business. This is not a value investment or a cheap company, a cheap investment by any means at all. In fact, it’s overvalued at the current market price.
Palintir can essentially use AI to optimize any business and show you the best outcome that has the highest potential profit while also showing you where your business's breaking points and weaknesses are. This has the potential to save billions if not trillions of dollars, help our planet fight climate change and avoid potential catastrophe.
There is a reason why so many government bodies are using this technology; there is a reason why so many global leaders in multiple different industries want to implement Palantir’s technology. Palantir envisions a future where every business is using AI to help make the best decisions possible.
Palantir has the potential to change the way businesses do business, they could totally change the competitive landscape around the world and given all of this potential.
Kathy Wood herself said that Palantir would grow into their valuation much more rapidly than people expect. The business is overvalued today based on any fundamental metric, but this is not a stock for someone looking for a quick gain or for dividends anytime soon because they are investing heavily into R&D and becoming a global leader. This is a stock for someone who sees potential in the company and is willing to hold through massive volatility while they execute on all of their potential.
So, if you do not believe that this company has potential to reshape the landscape of business in the future, then you should not own it. Please provide me with your comments below and let me know if I'm missing anything regarding this business.
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