“I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do” – Leonardo da Vinci.
I recently opened up a position in Palantir (NYSE: PLTR). In terms of overall value, this company may become one of the most important by 2030. They are not your typical tech company. Unlike Google, Facebook, and Amazon, they aren’t using your data for targeted advertisements. The technology is being used to detect criminal activity and prevent terrorist attacks.
Investing in Palantir goes against my philosophy of “invest what you know,” however, I saw this as a rare opportunity to invest in a start-up company before its growth accelerates. The biggest question for many about Palantir is what do they do exactly? That’s a difficult question to answer. Here is a piece from the New York Times Magazine that might better help:
The company, Palantir Technologies, is named after the seeing stones in J.R.R. Tolkien’s “The Lord of the Rings.” Its two primary software programs, Gotham and Foundry, gather and process vast quantities of data in order to identify connections, patterns and trends that might elude human analysts. The stated goal of all this “data integration” is to help organizations make better decisions, and many of Palantir’s customers consider its technology to be transformative.
What Palantir does is a little more complex than unclogging a toilet. Essentially, Palantir’s software synthesizes the data that an organization collects. It could be five or six types of data; it could be hundreds. The challenge is that each type of information — phone numbers, trading records, tax returns, photos, text messages — is often formatted differently from the others and siloed in separate databases. Building virtual pipelines, Palantir engineers merge all the information into a single platform. They work quickly. According to Jose Arrieta, who was H.H.S.’s chief information officer until two months ago, Palantir merged around two billion data elements related to the Covid-19 outbreak in less than three weeks. Once the data has been integrated, it can be presented in the form of tables, graphs, timelines, heat maps, artificial-intelligence models, histograms, spider diagrams and geospatial analysis. It is a digital panopticon, and having sat through several Palantir demos, I can report that the interface is impressive — the search results are strikingly elegant and easy to understand.
Palantir’s technology has been credited with saving its financial institution customers hundreds of millions of dollars, being used to detect Chinese spyware on the Dalai Lama’s computer, thwarting Pakistani suicide bombers, and unraveling Bernie Madoff’s Ponzi scheme. Its customers have included the CDC, police departments in America and abroad, and large corporations like JPMorgan and Home Depot. Palantir even sued the US Army in 2016 to force it to consider using its intelligence software after the Army chose to go with its own. Palantir won the suit, and then it won an $800 million contract.
Everything you need to know about Palantir, the secretive company coming for all your data
So why did I invest in Palantir? Here are a few reasons why:
#1 Sticky Product – The growing list of clients shows a. their software works and b. they have high switching costs. At this time, Palantir has no direct competition, and government agencies trust their software. This sounds similar to Intuitive Surgical (NASDAQ: ISRG). A company with little to no competition. I wrote about ISRG in a previous blog post: they have a monopoly on minimally invasive robotic surgeries. They are the leader today and will likely be the leader a decade from now. There is competition ahead however this industry will continue to grow rapidly. As innovation and technology improve, the number of procedures assisted by robotic surgeries will increase. The population is getting older, which means demand will continue. For ISRG, their da Vinci systems can cost anywhere between $500,000 to $2.5 million. It requires a lot of training and education for doctors and the medical staff to use their systems. For Palantir, their clients pay $10 million to $100 million annually. Every client requires an onsite implementation team with high-touch installation and customization. Clients for both companies are likely to stay because it would be so time-consuming and costly to go with a competitor. The technology would have to be substantially better for them to switch.
#2 Importance – Palantir’s software is being used to thwart terrorist attacks, detect money laundering schemes, prevent sex trafficking, etc… It would be hard to see this company go under, given how much they are tied into deterring crime and terrorism. Palantir is to data analysis tool as to what Boeing is to Civilian aircraft and aircraft engines. Like it or not, Palantir’s software is being used by the FBI, CIA, Department of Defense, Homeland Security, NSA, Marine Corp, Army, Navy, local police departments, etc. With their technology being a. more widely used and b. significantly better than anything else on the market, it would be hard to see the government allow this company to fold as they essentially have a monopoly in the government sector.
3. Growth – Palantir was founded in 2003, but its entrance into commercial businesses (B2B) is more recent. The government contracts are what pays the bills right now, but the corporate clients (big and small) could accelerate its growth. If Palantir can find a B2C product (which they don’t have and might never will), its market cap could be over $1 trillion. For this to happen, they need strong leadership, culture, and the most talented software engineers in the world. Check, Check, and Check!
4. Misunderstood – Companies like Palantir are focused on building their infrastructure and making innovative products rather than returning that money to shareholders. In the short term, they are not worried about generating profits. Palantir reinvests heavily, which makes their earnings look artificially low. This is not good for the stock price in the short, but if Palantir’s reinvestments pay off, it can create outsized returns in the future.
Palantir gets a lot of notoriety for working with U.S. Immigration and Customs Enforcement (I.C.E.) I.C.E. has two divisions in Homeland Security Investigations (H.S.I) and Enforcement and Removal Operations, (E.R.O). The fact is Palantir had a contract with H.S.I, which is responsible for cross-border criminal investigations, and not E.R.O., which is responsible for interior civil immigration enforcement, including deportation and detention of undocumented immigrants. These controversial agencies need resources, and if Palantir ended their contracts due to bad PR, what company would service them?
To keep this short, many people, including the media, have an ideological-driven narrative, focusing on some things and ignoring other things. There is no actual intellectual debate or discourse. Yes, Palantir’s technology is used to kill terrorists. Both political parties in our country, Democrats and Republicans, want to stop the bad guys. If this doesn’t work for your moral conscious, you perhaps should not invest in their stock. Apple, which I think is a great company, has been accused of breaking Chinese Labor laws and exploiting Chinese factory workers. These are decisions you have to make when evaluating a companies environmental, social and corporate governance.
5. Transformative CEO – When you invest in a company you are very much investing in the leadership in power to execute on their vision and plan. Remove Jeff Bezos from Amazon or Elon Musk from Tesla. Are these companies still as profitable? There is no way to measure this. Alex Karp borders on an eccentric genius to a paranoid mad man. He once said, “the only time I’m not thinking about Palantir is when I’m swimming, practicing Qigong or during sexual activity.” It is safe to say a lot of the most successful CEOs of companies are not quite normal. Only time will tell if Karp is the next Steve Jobs or Papa John. He’s not your typical CEO of a not-so-typical company tech startup from Silicon Valley. For me, that is what makes buying the stock so intriguing.
Palantir presents a tremendous opportunity for investors willing to take a risk and look foolish now but potentially look like a genius in the future. I recommend being long, risky assets. When a companies growth doesn’t happen until 3-10 years from now, the numbers do not make much sense today. A DCF model with Palantir makes a lot of assumptions that seem absurd when viewed through the lens of the present, but be clear in the future. Palantir follows the same model as Uber and Airbnb, focusing on long-term and sandbagging profits today. This is the strategy Amazon used to grow into the behemoth they are today.
What separates Palantir from other startups is that I view them as more intrinsically valuable for what they do and what their technology provides. There are stocks that I love that are much easier to explain with simpler business models. With Palantir, there is so much depth stacked on top of each other. I view the company as a unique unicorn that cannot be closely replicated. They help solve problems that we do not even know exist today. Once these problems surface, Palantir’s software becomes infinitely more valuable. There is a saying, “data is the new oil,” and with Palantir’s ability to synthesize data, they may become on par with Google and Microsoft. I am holding for the long-term. The Tesla-like growth in the future is just too enticing to pass up.
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