What Ails Palantirs Commercial Business?
UKRAINE - 2021/03/02: In this photo illustration the Palantir Technologies logo of a US software ... [+] company is seen on a smartphone and a pc screen. (Photo Illustration by Pavlo Gonchar/SOPA Images/LightRocket via Getty Images) SOPA Images/LightRocket via Getty Images  A big part of the investment thesis for government-focused big data and analytics player Palantir (NYSE: PLTR) hinges on the expansion of its commercial operations. However, recent progress has been somewhat mixed. The commercial business, which was Palantirs largest segment over 2018 and 2019, has fallen behind the government vertical, which has now emerged as the companys largest, and fastest-growing business. Over Q1 2021, commercial revenues stood at $133 million, up just about 19% year over year, well below the government business, which grew by 76% to $208 million. This is problematic for Palantir, as the government business has lower levels of transparency and comes with perception issues. Investors also tend to value government contractors with lower multiples. For example, the stock declined by almost 10% in the days following Palantirs Q1 results, as investors brushed off the companys earnings beat and strong guidance and focused on slower than expected commercial growth. That said, we think things could look up from here. Palantirs commercial business is primarily comprised of its Foundry software product - which it markets as a central operating system for an organizations data, that enables users to integrate and analyze the data they need in one place. The software finds applications in industries ranging from health care to manufacturing. Although companies have scaled back on IT spending over 2020, as they focused budgets on remote working and collaboration tools, they could renew their focus on other areas such as big data and analytics from this year onward. Palantir is also taking multiple steps to drive commercial segment growth. The company has been increasing its direct sales force, while also expanding its distribution channels with new partnerships with complementary software companies, system integrators, and cloud providers in a move that could increase its reach considerably. The company announced a distribution deal with IBM over the last quarter. Palantir has also taken steps to shift from a highly customized, time-consuming deployment model that relies on engineers to configure, maintain, and upgrade its tools, to a slightly more standardized model. Theres plenty of room to scale up the commercial business as Palantir estimates the total addressable market for its commercial operations at about $56 billion, just slightly below the $63 billion addressable market for the government vertical. See our interactive analysis on Palantirs Valuation for more details on the companys revenues, valuation, and how it compares with other analytics and software players. You can modify key variables to arrive at your own price estimate for Palantir. [5/13/2021]  Palantir, a company best known for its big data and analytics tools for government and large corporations, saw its stock decline by around 11% over the last week. Although the company actually posted stronger than expected Q1 2021 results on Tuesday, the stock was likely impacted by two factors. Firstly, investors dont seem too pleased with the companys continued over-reliance on the government sector for growth. Second, the broader sell-off in high multiple technology stocks over the last few days also appears to have hurt Palantir. While we think Palantir stock remains a little expensive, trading at about 24x projected 2021 revenues, and ahead of our $16 price estimate, the risk to reward trade-off is looking much better after the recent correction. See our interactive analysis on Palantirs Valuation for more details on the companys revenues, valuation, and how it compares with other analytics and software players. You can modify key variables to arrive at your own price estimate for Palantir. Although Palantirs government business continues to overshadow the commercial operations, with the business growing by 76% year-over-year to $208 million in Q1 2021, the company has made some progress in the commercial space as well. Over Q1, the commercial sales grew 19% year-over-year to $133 million, well ahead of the 4% growth rate it clocked in the previous quarter. Revenue per commercial customer is also picking up, rising by about 29% compared to last year. More significantly, revenues from the top 20 customers grew even faster at 34%, indicating that loyalty is strong, with customers seeing more value in the companys offerings. The outlook for the commercial business should also look up, considering that Palantir is significantly hiring for sales positions and recently formed a sales partnership with enterprise computing behemoth IBM. Moreover, the overall economics of Palantirs business is looking better, with adjusted gross margins rising to 83% from 75% last year, with the company raising its adjusted free cash flow guidance for the full year, from breakeven to in excess of $150 million. Palantir stock has declined by about 40% from its February highs, currently trading at around $22 per share. The decline is driven in part by the broader sell-off in high growth stocks, mixed December quarter earnings, and the expiration of the company post-IPO lock-up last month, which has enabled insiders to sell shares. Separately, recent comments by the companys CEO asking investors with a short-term focus to consider other stocks are also likely to have hurt the stock. We dont think so. While the revenue outlook remains quite strong, with the company on track to grow at 30% plus levels each year over the next two years, the companys valuation multiple is too high, in our view, with the stock trading at about 28x forward revenues. Palantir is also not yet profitable, despite the fact that it has been around for around 17 years now. Separately, the company is getting more dependent on government customers, rather than scaling up its corporate user base. For perspective, over Q4 2020, government revenue grew by 85% year-over-year to around $190 million, while the commercial revenue expanded just about 4% year-over-year to about $132 million. See our interactive analysis on Palantirs Valuation for more details on the companys revenues, valuation, and how it compares with other analytics and software players. You can modify key variables to arrive at your own price estimate for Palantir. [2/17/2021] Palantir Stock Updates  Palantir (NYSE: PLTR) stock declined by about 13% in Tuesdays trading and is down by almost 25% over the last 5 trading days. The sell-off is largely driven by a mixed December quarter earnings report. Although Palantirs quarterly revenues came in stronger than expected, it posted a quarterly loss. Palantirs revenue guidance for the full year 2021 was also lower than expected, with the company expecting sales to grow at over 30%, slowing significantly from the 47% growth rate it saw in 2020. [1] Although 30% growth isnt bad, Palantirs stock is priced for higher growth, trading at almost 35x forward revenues. Secondly, the company doesnt seem to be reducing its dependence on government space. Over Q4, government revenue grew by 85% year-over-year to around $190 million, while the commercial segment underperformed with revenue growing just about 4% year-over-year to about $132 million. Separately, Palantir also has a post-IPO lock-up period expiring later this week, and this is expected to increase the number of shares available for trading. Its possible that this is also putting pressure on the stock. See our interactive analysis on Palantirs Valuation for more details on the companys revenues, valuation, and how it compares with other analytics and software players. You can modify key variables to arrive at your own price estimate for Palantir. [1/20/2021] Up 2.5x Since Its IPO, What Really Changed For Palantir Stock  Palantir (NYSE: PLTR) stock had a solid run since last November, rising from levels of $10 to around $25 currently, after trading relatively flat in the weeks following its public offering in late September. Although sectors such as cloud-based software and big data and analytics have been much sought after with investors through Covid-19, Palantir was one of the few software names that saw little movement post its IPO. The stock looked like a decent value back in October trading at roughly 15x projected 2020 revenues. The reasonable valuation, slightly stronger than expected Q3 2020 earnings published in November, and a series of contract wins (albeit small) likely helped the narrative around the stock, helping to build momentum and gain visibility with investors. Moreover, investors seem to be appreciating Palatirs efforts to shift from a highly customized, time-consuming model that relies on engineers to configure, maintain, and upgrade its tools, to a slightly more standardized model. For instance, on its Form S-1, the company noted time required for its software to get up and running declined more than five-fold since Q2 2019 to an average of 14 days in Q2 2020. The standardization and lower resource usage are beginning to reflect on the companys margins. Over Q3 2020, Adjusted Gross Margins expanded to 81% up from 70% last year. Such standardization should also help the company scale up its customer base particularly in the commercial space, where the company estimates its addressable market at about $56 billion. [2]  That said, Palantir does look expensive at current valuations trading at over 30x projected 2021 Revenue presently. See our interactive analysis on Palantirs Valuation for more details on the companys Revenues, current valuation, and how it compares with other analytics and software players. The stock price of big data and analytics player Palantir (NYSE: PLTR) is down by about 20% over the past month. Although the company has seen some positive developments in recent weeks, including a new two-year contract with the UK National Health Service and a renewal of a previous deal with the U.S. Army that is valued at about $114 million for a year, the stock is being weighed down by a couple of factors. Firstly, some sell-side analysts have turned bearish on the stock, citing its high valuation. Palantir is up around 2.5x since its IPO and trades at about 28x projected 2021 Revenue. Secondly, Palantirs IPO lockup period  through which insiders are forbidden to sell their holdings  will expire following its next earnings release, likely in mid-February. While Palantir went with a direct IPO that enabled insiders to sell 20% of their holdings at the time of listing, they will be free to sell the other 80% of their holdings as the lockup expires, boosting the supply of the stock. Its possible that this could also be weighing on the stock. See our interactive analysis on Palantirs Valuation for more details on the companys Revenues, current valuation, and how it compares with other analytics and software players. [12/4/2020] Palantir Stocks 2x Rise Isnt Warranted  Palantir (NYSE: PLTR) stock has seen some big moves in recent weeks. While the stock had a muted debut post its September IPO, partly due to its direct listing that enabled insiders to sell their holdings, bolstering initial supply, the stock has more than doubled over the last one month, rising from levels of around $11 in early November to about $24 currently. While there hasnt been a big change to the companys fundamental picture to warrant such a jump, a combination of high retail investor interest in big data and analytics companies and marginally better than expected Q3 2020 earnings figures likely helped the stock. Over Q3, Revenues rose 52% year-over-year as the company continued to gain ground in the Government vertical (revenue up 68% year-over-year) with Commercial sales growing 35%. While we thought Palantirs valuation was attractive at levels of about $10 (see our comparison of Palantir and Snowflake below), we think its richly valued right now. Palantir now trades at about 40x projected 2020 Revenues. While this is still behind the likes of Datadog (which trades at 50x estimated 2020 Revenues) and Snowflake (over 150x), Palantir does have some unique risks. Firstly, Palantir typically benefits from significant economic and geopolitical uncertainty, and the Covid-19 pandemic and the related recession were likely big drivers of growth this year. However, with the availability of a highly effective Covid vaccine looking likely by early 2021, things could start to return to normal, potentially hurting growth. Secondly, Palantir remains highly dependent on government contracts (about 55% of total Revenue)  particularly in areas related to surveillance and national security  causing transparency and perception issues. Palantirs most recent report indicates that the company is actually increasing its exposure to this space. Also, as weve noted previously, Palantirs products dont scale as seamlessly as other SaaS players, as they need to be adapted to the unique needs of customers. This could also hurt long-term growth. See our interactive analysis on Snowflakes Valuation and Palantirs Valuation for more details on the two companies valuation. Palantir (NYSE: PLTR) stock rallied by about 35% over the last week, trading at levels of about $14 per share, after remaining largely listless post its late September debut. Big data and analytics is a hot sector at the moment, though investors have been on the fence about Palantirs stock, given its high exposure to government contracts and also due to questions regarding the companys ability to scale-up its user base. While its difficult to pinpoint what exactly caused the jump last week, there could be a couple of factors. Through Covid-19, Palantir has been seeing higher traction from the public health space, with its services used to track Covid-19 data from hospitals and to trace the spread of the virus. The company is also developing tools to help authorities with the logistics related to Covid vaccines. Last week it was reported that the company was in talks with the U.K government to support its contact tracing efforts in the country. This could give investors some confidence that the company is diversifying its revenue streams to an extent within the government space to areas that have lower transparency and perception issues. With the companys Q3 earnings due on November 12, investors are likely anticipating a strong quarter. [Updated 10/21/2020] Snowflake Vs. Palantir  The last month saw Palantir (NYSE: PLTR) and Snowflake (NYSE: SNOW)  two relatively high-profile software players go public. Snowflakes software enables organizations to manage and analyze large quantities and diverse types of data across public clouds such as Amazons AWS in a single, easy-to-use platform. Palantir offers big data and analytics solutions primarily used by governments and intelligence agencies, although it has been expanding its presence in the commercial space. While the two companies are focused on big data, investors are valuing them very differently. Snowflake stock trades at over 120x projected FY21 Revenues (FY ends January) while Palantir trades at just about 15x projected FY20 Revenues (FY end December). We provide more details below. See our interactive analysis on Snowflakes Valuation and Palantirs Valuation for more details on the two companies valuation. Revenues & Growth Rates  Palantirs Revenues grew by 24% to about $740 million in 2019 and growth is likely to pick-up to levels of over 40% in 2020 as Covid-19 related disruptions increased demand for the companys services. In comparison, Snowflake saw Revenue grow 173% from $97 million in FY19 to about $265 million in FY20, although the growth rate is likely to slow down to roughly 110% over the current fiscal based on consensus figures. Overall, Snowflakes Revenues should grow at a higher rate compared to Palantir, considering its SaaS-based model which can scale to a large base of customers with much less customization. Palantir, on the other hand, needs engineers to adapt its tools to the unique needs of customers. Snowflake had over 3,100 customers as of July 2020, compared to Palantir which had about 125 customers as of its last fiscal year. Profitability  While Palantir is slightly ahead in terms of profit margins considering that it is the more mature company (Palantir was founded in 2003 versus Snowflake which was founded in 2012), we expect Snowflake to be more profitable in the long-run given its relatively more standardized product and lower customer acquisition costs. Snowflake posted a Gross Profit Margin of 62% for the first six months of FY21, with Operating Margins standing at -72%. Palantirs Gross Margins stood at about 72% over the first six months of 2020, with Operating Margins coming in at about -35%. Valuation  Snowflake stock has more than doubled from its IPO price of $120 to about $250 currently, valuing the company at about $70 billion. Palantir, on the other hand, hasnt moved too much since its listing and is valued at about $15 billion. There are a couple of reasons for Snowflakes premium valuation. Firstly, the company is growing much faster than Palantir and should also be more profitable in the long-run given its highly scalable delivery model. Investors have also been paying a big premium for growth stocks. Secondly, unlike Palantir which has high exposure to government contracts  particularly in areas related to surveillance and national security  causing transparency and perception issues, Snowflakes business is focused on more commercial customers. That said, Snowflake has considerable valuation risk, considering that it trades at about 122x projected FY21 revenues, compared to Palantir which trades at just about 15x projected 2020 Revenues. The story could change quickly. If Snowflakes growth rates slow down, with the company facing competition from cloud majors such as Amazon and Google who offer their own data warehousing solutions, investors could re-think its valuation. On the other side, investors could double down on Palantir stock if they see more proof points indicating that the company is making progress in the commercial sector, via high-profile deals or stronger Revenue growth. While Palantir stock may have moved considerably, 2020 has created many other pricing discontinuities that can offer attractive trading opportunities. For example, youll be surprised how the stock valuation for Microsoft vs. Corcept Therapeutics shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here. See all Trefis Featured Analyses and Download Trefis Data here