Palantir: The Black Box Company People Love To Hate
May 27, 2021 9:00 AM ET Palantir Technologies Inc. (PLTR)
Palantir continues to expand its relationship with Uncle Sam as 9 new contracts have been signed since the end of Q1.
Palantir should benefit from tailwinds created by President Biden's Executive Order around cybersecurity and the $80 billion proposed funding for the IRS in The American Families Plan Tax Compliance Agenda.
Palantir continues to generate new partnerships in their commercial and government business dealings and I believe the 30% YoY estimates will end up being conservative.
Palantir Technologies headquarters campus exterior view in Silicon Valley. - Palo Alto, California, USA - 2019
Photo by Michael Vi/iStock Editorial via Getty Images
Still, after a Direct Listing in 2020 and 3 quarterly earnings reports, Palantir (PLTR) is referred to as a black box. This stigma won't disappear because of PLTR's dealings with the U.S Military and Defense Community. People continue to dismiss PLTR because they are unclear about what they do in certain aspects of their business dealings. As an American, I am proud of the work PLTR does and how they continuously partner with the United States Government to enhance their capabilities. I have taken the exact opposite approach and celebrate PLTR's partnerships with the defense community, including the direct relationships with the United States Air Force, Department of Defense, United States Army, United States Justice Department, United States Special Operations Forces, and the United States Coast Guard. Having close personal friends who have served our great country in the armed forces, some of whom are still active, I am glad there are companies such as PLTR supporting them. PLTR also has direct relationships with other branches of the government, including the Department of Energy, Food and Drug Administration, Security Exchange Commission, Internal Revenue Service, and many other government agencies.
If you can't get past the fact that PLTR can't discuss some of their dealings with certain entities within the U.S. government, then that's your loss. As a publicly-traded company, PLTR discloses how much revenue is generated from the government side of their business and provides updates on their deals. If you take the time to look through the Federal Procurement Data System, you can see every deal PLTR has with the United States Government. Since the end of Q1 2021, PLTR has signed 9 additional contracts with the United States Government. While these business dealings may turn some off, I see continuous revenue and growth. In addition to PLTR's stigma of being a black box, some criticized that PLTR had former United States Navy Seal Officer Jocko Willink as their operator on the recent earnings call. Mr. Willink is a hero who served the United States with honor. PLTR's choice to have Mr. Willink as their operator on the Q1 conference call shouldn't be a topic for discussion regarding the stock. The bottom line is PLTR has explosive growth and is increasing its commercial customer base while signing additional contracts with the United States Government. PLTR is my highest conviction growth stock, and I continue to purchase shares as I cost average up. I believe PLTR will become one of the most important software companies in the 2020s and I will be along for the ride. If you're an investor with a long time horizon, PLTR should be on your radar.
Palantir continues to sign contracts with the United States Government with 9 additions since the start of Q2 2021
The Federal Procurement Data System can be a treasure trove of information for companies who do business with the United States Government. Many of these deals didn't make the headlines, but PLTR inked 9 deals with different government agencies so far in Q2 2021. The following government agencies include the National Institute of Health, Federal Acquisition Service, United States Immigration and Customs Enforcement, Internal Revenue Service, Securities and Exchange Commission, Offices Boards and Divisions, Office of the Assistant Secretary for Administration, and the United States Coast Guard have enlisted PLTR's services. There is $33 million of current action obligations from these contracts, which increases to $73 million and change on the total action obligations. When all of the options are added in, the total contract value would be worth just over $122 million to PLTR.
Government contracts are a large part of PLTR's business, but that shouldn't be held against them. I love government contracts, especially if it's the United States Government because the revenue is pretty much guaranteed. In 2020 PLTR generated $610 million of its $1.09 billion total revenue from government contracts. In Q4 of 2020, PLTR's government business segment generated $190 million in revenue, increasing 85% YoY. PLTR continues to grow its government business, and in Q1 of 2021, PLTR generated $208 million in revenue from its government contracts which was an increase of 76% YoY. PLTR also saw their U.S government customers increase by 83% YoY.
Playing connect the dots with Palantir, the Securities and Exchange Commission and the Internal Revenue Service
I believe PLTR is playing it safe with its growth estimates, and I wouldn't be surprised if 30% is on the low end of the spectrum. First, I want to discuss the recent news about the IRS. The Department of The Treasury recently released The American Families Plan Tax Compliance Agenda. In the executive summary, it indicates that:
The first step in the President's tax administration efforts is a sustained, multi-year commitment to rebuilding the IRS, including nearly $80 billion in additional resources over the next decade.
The IRS would grow manageably (no more than around 10% annually) but also have certain funding in place to make investments with large fixed costs-like modernizing information technology, improving data analytic approaches, and hiring and training agents dedicated to complex enforcement activities
Section IV of this agenda is the President's compliance proposals. President Biden's compliance proposals include:
Increasing the resources of the IRS to pursue noncompliant taxpayers and better serve the vast majority who are fully compliant
Leveraging information that financial institutions already collect to shed light on those taxpayers who misreport income derived from opaque categories
Overhauling antiquated technology to help IRS leverage 21st century data analytic tools
Regulating paid tax preparers and increasing penalties for those who those who intentionally commit malfeasance
Palantir Is A Better Tesla And Should Drive Stronger Returns
Within a day, both the Securities and Exchange Commission and the Internal Revenue Service signed deals with PLTR. On 4/29/21, the Securities and Exchange Commission signed a deal with a completion date of 6/18/22 and an ultimate completion date of 6/18/25. This deal is worth $13 million for its action obligation and $32 million for its total contract value. The description of requirement specifically says, "Enterprise Data Analytics Platform (EDAP) - Palantir Software and Support." On the very next day, 4/30/21, the Internal Revenue Service signed a deal with PLTR worth $5.6 million with an ultimate completion date of 9/20/21.
The recent report from the Department of The Treasury specifically discussed increasing funding of the IRS by $80 billion and allocating capital to modernizing information technology and improving data analytic approaches. The Securities and Exchange Commission just purchased PLTR's Enterprise Data Analytics Platform. If The American Families Plan Tax Compliance Agenda passes, some of the funding should find its way to PLTR. I don't believe any of this is a coincidence. Compliance organizations are currently using PLTR's Foundry system to accelerate and improve their investigations. Foundry enables compliance organizations to respond to regulatory requests for information in hours rather than months. These are complex investigations that are discovering previously undetectable risks. Foundry allows organizations to conduct analytics across high-scale production data in close to real-time.
The Securities and Exchange Commission and the Internal Revenue Service signed deals within one day of each other with PLTR. Next, The Department of The Treasury released The American Families Tax Plan Agenda, which calls for almost $80 billion in funding to the IRS and specifically indicates modernizing information technology and improving data analytic approaches. I believe this is all connected as PLTR is becoming the software vendor of choice for many segments of the United States Government. As PLTR continues to expand its relationship with the government, I believe that if the American Families Tax Plan Agenda is passed, PLTR will be selected to overhaul the IT infrastructure within the IRS.
Connecting the dots with Palantir in the cybersecurity space.
The United States has suffered two major attacks on core infrastructure in the past 6 months. Many people still associate attacks on infrastructure with being physical. In 2021, core infrastructure can categorize as virtual, and attacks can occur via cyber warfare. Recently the Colonial Pipeline experienced a ransomware attack that followed a SolarWinds (NYSE:SWI) hack roughly 6 months prior. President Biden signed an executive order to strengthen the United States cybersecurity and deemed this a top priority as the remediation of cyber incidents is essential to national and economic security. On 5/12/21, The White House released the Executive Order, and there is a critical paragraph that should be read closely:
Incremental improvements will not give us the security we need; instead, the Federal Government needs to make bold changes and significant investments to defend the vital institutions that underpin the American way of life. The Federal Government must bring to bear the full scope of its authorities and resources to protect and secure its computer systems, whether they are cloud-based, on-premises, or hybrid. The scope of protection and security must include systems that process data (information technology (IT)) and those that run the vital machinery that ensures our safety (operational technology (OT))."
The wealth management firm Wedbush has indicated that only 40% of workloads are on the cloud, and this will increase to 70% by 2025. Wedbush believes that shifting to cloud from on-prem has left data and endpoints exposed, creating a growth catalyst over the next 12-18 months. Cybersecurity has become one of the most critical security aspects in 2021, and I believe this will become a major tailwind for PLTR. Cyber is one of PLTR's focal points, and the federal government will look to take swift action. With all PLTR's recent deals with the United States government, I believe wet ink from Uncle Sam's pen will continue to finalize new contracts for PLTR. Keep in mind on 4/5/21, PLTR was selected by the National Nuclear Security Administration to provide its Office of Safety, Infrastructure, and Operations with a platform for effective knowledge management and data-driven decision-making. The National Nuclear Security Administration maintains and enhances safety, security, and effectiveness. Considering that PLTR helps secure and maintain the United States nuclear stockpile, I think it's safe to say their software is at the top of the food chain. I believe that President Biden's executive order will benefit PLTR significantly over the next several quarters, and PLTR will experience tailwinds they didn't account for.
Palantir and Space Force expand their partnership
PLTR continues to deepen its ties to the defense community as it confirmed they would provide software to the critical missions of the Department of the Air Force (DAF), Space and Missile Systems Center's Cross-Mission Ground & Communications Enterprise (SMC/ECX), and NORAD-NORTHCOM. By deploying its Data-as-a-Service platform, PLTR will support the Space Command and Control program, including users at the National Space Defense Center and the Combined Space Operations Center. This partnership expansion also provides additional support for NORAD-NORTHCOM's Joint All Domain Command and Control transformation.
This contract totals $32.5 million at a firm-fixed-price. While the investment community may never learn more than what the press releases indicate or the numbers PLTR reports on its quarterly earnings calls; the most important aspect is growth. As long as the amount of revenue generated from PLTR's government contracts is published and continues to grow, do we really need to know the details? As a shareholder, the numbers are all I need to make my investment decision, and if the stigma of being a black box never leaves PLTR, that's fine with me. The most important thing is that Uncle Sam keeps signing new contracts and, more importantly, signing checks.
Palantir will play a critical role in shaping societies future
For decades people have envisioned a world with futuristic planes and massive robotic exoskeletons to enhance the capabilities of humans. On the Q1 call, PLTR confirmed that their investments in Lilium and Sarcos weren't solely capital-based. Lilium has constructed the first electric vertical take-off and landing jet. The Lilium 7-seater carries 6 passengers and 1 pilot. Lilium is projecting that 1,000 jets will be in operation by 2027, with 30,000 tickets sold annually. These jets are estimated to generate $5 million in revenue on an annual basis per jet. Sarcos is making robotic exoskeletons to revolutionize the industrial workforce through robotics. The U.S military is also interested in Sarcos as they are making the Iron Man suit a reality. Sarcos becomes very interesting as they currently have contracts with the United States Air Force, Marine Corps, SOCOM, and the United States Navy.
From PLTR's Q1, we know that Lilium will use Foundry for many aspects of their business and Sarcos will use Foundry for industrials and manufacturing, and Apollo for Edge AI with the exoskeletons. When it comes to Sarcos it makes complete sense for PLTR to be an investor while playing a role in creating their software. Lilium and Sarcos are two companies that could play a large role in shaping society over the next decade. Sarcos has investments from some of the largest corporations, including Microsoft (MSFT) and Caterpillar (CAT), with countless target customers, including none other than Uncle Sam. Sarcos' robotics can be used for many applications, from warehouses to construction to the defense industry. Lilium could change how short-range travel is conducted when an individual doesn't want to sit in a car for 2-3 hours. PLTR is a leader in software innovation and is building the platforms for Lilium and Sarcos from the ground up.
Conclusion
PLTR is expanding its commercial business as 3M (MMM), BP plc. (BP), Rio Tinto (RIO), and other industry titans are utilizing their software. In Q1 2021, PLTR added 11 commercial customers and generated $133 million, which increased 19% YoY in revenue from its commercial business. PLTR continues to expand its relationship with Uncle Sam and other allied governments as revenue from the government sector increases by 76% YoY in Q1 from $118 to $208 million. The $341 million PLTR generated in Q1 generated $151 million in adjusted free cash flow representing a 44.28% margin. PLTR has forecasted 30%+ growth YoY through 2025, judging by its current deals; I think this is very conservative. PLTR also hasn't recognized the benefits of its partnership with International Business Machines (IBM) as PLTR is offered for IBM Cloud Pak for Data. I wish more people would get past the black box stigma because PLTR is one of today's most interesting growth companies. I started buying shares around $9.80 and have paid close to $30. I will continue to cost average up at its current levels as I believe this will be a great long-term investment.
This article was written by
Steven Fiorillo
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