Is Palantir the Government Big Brother?
There is a sector of the stock market that is referred to as “sin stocks.” Typically, they are defined as those companies that engage in fair business practices in dubious industries. Think casinos or cigarette manufacturers. Some people even put companies like Google on this list because of the work done with the government, or defense companies like Boeing due to anti-war stances. Well one highly controversial company went public in 2020 amidst a wave of crowd-noise and just general confusion. What do they do? Who are they? Is this a good investment? And why do people hate their founder, Peter Theil? Let’s break down Palantir Technologies.
Top-Line Numbers
Market Capitalization: $46.79 billion
Full Year 2020 Revenue: $1.09 billion (+47.15% YoY)
Q2 2021 Revenue: $375.64 million (+49.13% YoY)
Q2 2021 Net Income: -$138.58 million (-25.46% YoY)
How Did Palantir Get Started?
Named after the “palantiri” from Lord of the Rings (no I’m not kidding), Palantir was founded in 2003 by Peter Thiel, current chairperson, Alex Karp, current CEO, Stephen Cohen, Nathan Gettings and Joe Lonsdale. This group invoked the Tolkien lore to name their company, and it’s appropriate! In the story, a palantiri is an all-seeing seer stone that is indestructible and can view anyone, anywhere at any time. Starting to get the gist of the company?
Thiel and Karp were living in the same building in college. Where? You guessed it: Stanford! The two were apparently frequent sparring partners due to their differing political ideologies, but grew a mutual respect. Years later, Thiel began to get his first company, PayPal, off the ground, but began to experience issues with fraud on the platform. Taking some early cash from Paypal, Thiel bankrolled two other Stanford grads, Lonsdale and Cohen, as well as PayPal engineer Gettings, to form a prototype of an anti-fraud data platform that later became Palantir’s flagship product: Palantir Gotham. Karp was then brought in as CEO, and the roadshow was on! However, having been laughed out of most funding meetings from firms that weren’t owned by Thiel, the company found a lifeline: In-Q-Tel. If you aren’t familiar, as likely no one on Earth is, IQT is the venture capital arm of the United States Central Intelligence Agency. You read that right. Everyone’s in on the VC game now, apparently.
Having been thrown a $2 million bone by IQT, this actually gave the founders access to intelligence agencies, from which they hired engineers and developed products to fit the needs of. From this root program developed for the intelligence sector, they realized they could apply these similar learnings to private sector companies like banks and private corporations that experience large amounts of fraud. From there, big business was born. This culminated in their direct listing to the New York Stock Exchange in late 2020, where they saw a 200% share price increase in a month.
What Is Palantir?
Palantir is a technology company that specializes in the intake and analysis of "big data" streams, using both A.I and human moderators. They specialize in government security contracts, as well as Fortune 500 data intake.
If you ask them, it’s “big data.” If you ask others that know the business, they’re in the business of spying. For those with an Orwellian-bent, they are what are known as “big brother.” They pioneered what they call “intelligence augmentation,” which is effectively the marriage of compiling data and having analysts dig through the data, rather than one or the other. And let me tell you: it is POPULAR. Their business model essentially boils down to this concept, tailored for the industry that purchases it. Are you a government agency? Welcome to Palantir Gotham. Are you a bank or a hedge fund? You’re going to love Palantir Metropolis. How about a private sector company that just hates fraud? Welcome to Palantir Foundry. And their clientele is a who’s who of organizations that directly impact your life on a daily basis. They currently have contracts with: the CIA, FBI, NSA and Department of Defense, The Information Warfare Monitor, Morgan Stanley, J.P. Morgan Chase, the NYPD, Fiat Chrysler and more. They are so potent within the federal government that then-Vice President Joe Biden called them out by name in a speech about combating fraud in the RATB stimulus roll-outs of 2010. He was so impressed by the technology, he shipped it immediately over to Medicare and Medicaid, further expanding Palantir’s reach.
Will I Invest In Palantir?
This company might be the most fascinating I’ve discovered to date. It flashed on my radar because of a story I wrote last month about Thiel and his Roth IRA (check it out here if you missed that). Thiel has been attached to some of the biggest companies in the world, including PayPal and Facebook, so a company with his name on it is pretty intriguing. I also wanted to look at this company because it’s the first one I’ve covered with a true B2B-only model, maybe outside of Outbrain. You as an individual couldn’t go out and buy Palantir services, which also makes their contract sizing really interesting to me.
Looking at the financials of the most recent quarter, their influence seems to be growing. Not only did they post upgraded revenue this quarter compared to last year, but they reiterated their revenue guidance at an annualized growth rate of 30% through 2025. That means that they are predicting going from a little over $1 billion in revenue for full-year 2020 to over $4 billion in 2025.
That’s exceptional growth if it can actually achieve it, and I don’t have much reason to believe that it won’t achieve its lofty revenue goals. Palantir is in the business of big data, and that sector isn’t shrinking anytime soon. Every time we swipe a credit card, visit a website or check-in on Facebook, we are leaving a part of our digital identity there with it. Palantir is able to take this data, aggregate it, run it through their own proprietary AI and then deliver it to their analyst team who can scope out any issue presented to them. The idea is brilliant, and companies have noticed.
Word of mouth seems to be the main business driver here. Starting with the CIA, they spread to other government agencies. Then they spread to state agencies, including the NYPD. The NYPD then referred them to JPMorgan, where the work done for them spread word to Morgan Stanley, and so on. The referral these guys have is on par with Bluehost in terms of their affiliate marketing. This is all to say that data is everywhere, and anywhere there is data, there is Palantir. Allied Market Research expects the business of “big data” and analytics to compound annually at a rate of near 11% between 2020 and 2027, making the market opportunity literally logarithmic for a company like this. If Palantir are able to hold their place in the market and expand as aggressively as they think they can, then an exceptional market capitalization is theirs for the taking. They also signed new clients in Q1 of this year, including PG&E, Rio Tinto and British Petroleum (BP).
So if this is the leader in a space it pioneered, has sticky contract with government agencies, is in a rapidly growing market and has rapidly compounding growth, then this is an instant “buy,” right?
Palantir's Bear Case
Nope! Here’s why: Palantir is an incredibly divisive company. There’s a reason I opened this article talking about sin stocks. Palantir is not a tobacco maker or a casino, but they are actual corporate spies. They take in this data from everyone, consent or no, and funnel it through their system to assist governments in pattern recognition and threat detection. Many aren’t cool with that type of investment. Then, there’s the controversy…
Who Is Peter Thiel?
First, let’s talk about Thiel. Yes, he’s a genius businessman, but he’s also…eccentric. Making his money in selling PayPal to eBay for $1.5 billion, he then angel invested $500,000 in a little startup called Facebook. After Facebook IPO’d, he made another $600 million in share sales, before closing out his position in the company for a little over
$1 billion total. This allowed him to move on to more “interesting” passion projects. One of them was to pick a very public fight with blog site Gawker in 2016, bankrolling a lawsuit around invasion of privacy brought forward by Hulk Hogan (figure that sentence out). The end result was the shuttering of Gawker and Hogan winning $140 million. Other passion projects include developing “friendly artificial intelligence,” pursuing life extension and signing himself up to be cryogenically preserved, and has donated vast sums of money to organizations that forward the concept of seafaring civilizations to set up experimental governments and habitats. He reportedly also employs the use of a “blood boy,” effectively transfusing a younger person’s blood into his body for life extension reasons. Some reports refute this, but it’s prevalent enough to where HBO’s “Silicon Valley” based part of a character’s personality on this concept. He’s also an extremely outspoken conservative, a rarity in the Silicon Valley tech world, having donated to dozens of Republican national candidates. His political views forced a separation between him and Y Combinator in 2017.
Outside of Thiel, the company itself has had its fair share of controversies and bizarre moves. In 2012, they settled out of court with I2 Inc, who claimed that the proprietary AI algorithm Palantir relies on was stolen. They also had a run-in with WikiLeaks support via a partner firm in HBGary Federal. In 2016, they had a lawsuit filed against them by the U.S Department of Labor for “routinely eliminating” qualified Asian applicants during the hiring process, which was also settled out of court. They also have a big contract, and deep relationships with, the U.S Immigration and Customs Enforcement agency, which is controversial in itself. Reports in 2020 indicate that Palantir’s data was directly responsible for human rights violations against asylum-seekers and migrants. Just this week, the company disclosed a $50 million purchase of gold bars to protect against “future black swan events.” Finally, and most importantly, is Project Maven.
What Is Project Maven?
Project Maven is a Department of Defense initiative that was openly shopped to various data and technology firms, resulting in a bidding war that was won by Google in 2018. Project Maven is an artificial intelligence program designed to spearhead the flight of unmanned aerial vehicles autonomously, without the need of a pilot. The awarding of Project Maven to Google resulted in a full employee walkout of Google employees, causing Google to recant on the contract and withdraw their name. The project was then awarded to Palantir. This project is highly criticized in that it could lead to a Terminator-style autonomous weapons program, serving as judge, jury and executioner.
The Bottom Line
I normally have a good time writing these and really digging into these companies, but I had a great time on this one. This company is beyond interesting, and really only operates in the shadows. So I see two cases here:
1. Bull case – the total addressable market for this company is big and getting bigger, fast. At an 11% CAGR, the speed at which Palantir can grow is extreme. They also have great referrals, moving quickly through the private sector and expanding to state and local government organizations.
2. Bear case – they are running out of government contracts to grab, and have expanded to where they’re going to expand in the public sector leaving little room for growth. They’re also dangerous, running into controversy after controversy, with Project Maven the jewel in the crown.
For me, this is a no-go. I appreciate that you can certainly make some money in this company, but it’s just too controversial for me. Modern investing and trading, to me, is very much a “buy the rumor sell the news,” and I think that applies to the fundamentals of the company as well. I believe the controversy is too much to outrun with Palantir, and for that, I’m out.
Short-term: Neutral
Long-term: Short
The following is for entertainment and informative purposes only, and should not be taken as strict investment advice. Please do your own research and do not buy or sell securities based solely on what you read here.
