Palantir Stock - The Next 1 Trillion Dollar Company?

The high-flyer of this stock market year has now even been included in the S&P 500 Index. Here's my very personal opinion.

Sep 29, 2024

Today I want to write about a company that is outside my portfolio. The stock of Palantir, which was not listed on Wall Street until the end of 2020, has actually been included in the S&P 500 index of the largest US companies as of this week.

Just 1-2 years ago, I would not have believed that Palantir would make it into this elite circle. But the company has been one of Wall Street's high-flyers for some time now: Palantir's stock has quadrupled since its IPO and is now a favorite of many retail investors.

Palantir stock is currently hitting new highs, fueled by the fact that many institutional investors and ETFs now (must) include the stock in their portfolios as a member of the S+P 500.

The company polarizes like no other, is particularly popular with retail investors and finfluencers, and can almost be mentioned in the same breath as Nvidia and Tesla in terms of popularity.

I am regularly asked for my opinion on Palantir, which I give here. A disclaimer up front: Palantir is one of those enterprise software companies that, despite my best efforts, I don't really understand.

I'm happy to admit that I don't really understand the technology, the USPs, or the business model. Nevertheless, I have developed a very personal opinion about how I feel about a potential investment in Palantir:

History of Palantir

Palantir Technologies was founded in 2003 by Peter Thiel, Alex Karp, and Stephen Cohen, among others. The company was founded in Silicon Valley with the goal of developing software that would allow analysts to analyze large amounts of data and identify patterns to solve complex problems. The concept was heavily influenced by Thiel's experience building PayPal, particularly the need to improve fraud detection systems.

Early years and intelligence agency focus

Palantir's first software platform, Palantir Gotham, was aimed primarily at government intelligence and law enforcement agencies. The CIA was one of the first major customers and even invested in the company through its venture capital arm. Gotham helps intelligence agencies and the military efficiently analyze massive amounts of data to identify threats.

Expanding into the commercial sector

After gaining a foothold in the public sector (particularly with U.S. government authorities), Palantir began expanding into the private sector since 2016. The second main platform, Palantir Foundry, was developed for commercial applications and is used by large companies in industries such as finance, healthcare, and manufacturing. Companies use the software to analyze data, streamline business processes, and make better decisions. The commercial sector now accounts for just over half of Palantir's total revenue.

Public Perception and Data Privacy Debate

Over the years, Palantir has been criticized for its close ties to government agencies, particularly police and immigration authorities. Many feared that Palantir's analytics tools could violate privacy and be misused to monitor citizens. This led to controversy over the use of the technology, particularly in the area of immigration policy in the US.

IPO and recent developments

In 2020, Palantir went public via a direct listing on the NYSE. The IPO highlighted the company's growth potential and continued expansion in both the public and private sectors. Since then, Palantir has expanded its product offerings to focus on topics such as artificial intelligence and machine learning.

The company now has a number of proprietary software platforms, including Gotham, Foundry, Apollo, and AIP, that offer the latest data integration and analytics capabilities. In particular, the new AI platform has positioned the company as a key player in data analytics, particularly in security, but also in a variety of other industries.

Critical Analysts

Analysts are divided on Palantir. There are roughly as many sell recommendations as buy recommendations. The average analyst price target is 25% below the current share price.

Palantir Analyst rating & recommendation

This is unusual. It makes Palantir one of the most overvalued stocks in the S&P 500, according to the numbers of the StocksGuide screener.

Or do many analysts simply not understand the company?

If you look at the finfluencers on X or Substack, the answer seems clear. Social media is full of buy recommendations. The hype surrounding Palantir stock and CEO Alexander Karp in the social media bubble can only be compared to the fan cult that surrounds Elon Musk and Tesla. The fan community firmly believes that Palantir could be the next 1 trillion USD company.

The extraordinary CEO will make sure of that (they say).

The CEO Alexander Karp

Who is this person that the masses of retail investors trust so much?

Co-founder and current CEO Alex Karp is probably one of the most enigmatic tech CEOs around. He is an American lawyer with a German doctorate in philosophy. Dr. Karp is known for his unconventional leadership style and prides himself on not fitting the typical image of a tech CEO. His academic training and interest in philosophy inform his leadership at Palantir.

Here is a recent video he made for his employees (whom he calls "Palantirians") to celebrate their inclusion in the S&P500 Index:

If you are interested in Palantir stock, or if it has already crept into your portfolio, please make up your own mind about this man.

Karp's leadership style is characterized by ethical reflection, independence from market trends, and an unconventional lifestyle. These qualities make him a unique figure in the technology industry, but they can also cause tension with traditional investors and Wall Street.

He sees himself as a rebel, repeatedly emphasizes the moral considerations involved in running Palantir, and says he is not only interested in monetizing data, but also in strengthening the U.S. and the Western world.

How credible and authentic this is is a matter of opinion. The fact is that Alex Karp has always negotiated very well with investors, including for himself: He holds a relatively small stake in the company, but despite his relatively small stake compared to other co-founders such as Peter Thiel, Karp has a lot of influence on the company's management through special voting rights. Palantir has a multi-class share structure, some of which give holders more voting rights per share. This structure allows Karp and the other founders to control the company even if they do not own a majority of the shares.

Few CEOs are as aggressive in marketing their companies to investors. He is extremely confident (to put it mildly) and likes to portray himself as the savior of the US. Karp keeps repeating that his company has the potential to grow tenfold.

Given this confidence it seems odd, to say the least, that Alex Karp sold Palantir shares for hundreds of millions of dollars after announcing its inclusion in the S+P 500.

Why is that?

Valuation of Palantir Stock

Palantir's stock is valued at more than 30 times revenue and more than 100 times cash flow. The P/E ratio is over 200.

These valuation multiples are reminiscent of the hype around cloud stocks through the end of 2021. What followed was a crash for these stocks. Most of these SaaS stocks lost a lot of value then and have not recovered much to this day, even though the fundamentals of these companies are often strong.

In the case of Palantir, I do not see how the company can grow into its lofty valuation any time soon. The company is growing at a good 20% per year and will have revenues of just under 3 billion USD in 2024. Profitability has been strong in recent years, with cash flow margins of around 30%. This is commendable, but not so exceptional as to justify such an extraordinary valuation.

The current high profitability is also due to the fact that Palantir now spends less than 18% of its revenue on software development. This does not exactly fit the image of a developer of an innovative new software platform whose value creation is set to grow rapidly into completely different dimensions.

By comparison, Palantir has invested over 400 million USD in development over the past 12 months. Its competitor, Datadog, has roughly the same revenue as Palantir, but has invested more than 1 billion USD in development over the same period.

Conclusion

I would not consider Palantir as an investment because I do not understand the company, its technology, or its competitive advantages.

An investment would only be a vote of confidence in the management team around Alex Karp. I've seen a few videos of him and read interviews, but there's no spark. I don't trust him. I would therefore advise the lucky Palantir shareholders among you to do the same as Palantir's CEO and think about taking profits. VALUATION MATTERS.

If you want to follow my own investment ideas outside of Palantir in the future, you can

*Disclaimer: The author and/or associated persons or companies do not own shares in Palantir. This article is an expression of opinion and does not constitute investment advice.