Palantir market cap : $41.24bn
Trailing 12 month (TTM) Revenue : $1.092bn
TTM Gross Profit : $740m (67% margin)
Assuming business grows 40%, Forward gross profit : $1bn
Forward Gross Profit Multiple : 41x
Anything that grows 40% but also trades above 20x forward gross profit is very expensive. My last biggest investment was Facebook which I was buying at a 12x forward gross profit and i’m already up 13% in a few months on that (average purchase price was $266, currently trading at $301 as of 22nd April).
There is power in buying something growing in excess of 20% that’s trading at a relatively cheap multiple. Facebook also commands a fat 80% gross margin. It is a great investment in my book.
Palantir appears to be none of those. It is a very difficult business to understand. That makes figuring out its value in 10 years challenging. However, sometimes, taking a flyer on a business that’s doing hard things can have assymetric upside.
I have spent months looking at Palantir and figuring out what it does. What I have found is that this business makes software that solves incredibly challenging business problems. Stuff that can’t be easily solve by a SaaS solution.
In traditional SaaS, a business comes up with software that can be purchased and used on a subscription basis. This software can be very complex and useful (Snowflake’s datalake is an example), but it is somewhat tailored to be sold to many organisations on a “self-service” basis.
Palantir does not work this way. It is a powerful software suite that requires deploying (like a pre-SaaS enterprise software solution such as SAP). It appears to be a “jack of all trades, master of most” solution that has the capability of burrowing deep into an organisation, unifying information and presenting it to employees.
A unified dashboard for a business if you will.
How do you value such a business? How do you project growth for a business that makes software that is so general-purpose that it can be used in any industry? I have tried and I simply can’t.
I think Palantir’s power is best exemplified by Airbus. Airbus uses Palantir Foundry to power a software suite called “Skywise” that it offers to airlines. Here’s a wonderful Reddit post about what Skywise can do. TLDR : It’s ridiculously useful.
How I think about companies like Palantir
Within our portfolio, my wife and I own companies that make no sense (valuation wise). These are :
Palantir
Tesla
Lemonade
All 3 companies are grossly overvalued. However, all 3 companies are doing “hard-to-do-things”.
Tesla’s valuation will be cheap if (and when) they roll out autonomous driving. Here’s a series of interviews that deep dives this.
Lemonade’s valuation depends on their ability to do what no insurance company has been able to do - go global with insurance and use the underlying tech stack to dramatically drive customer acquisition costs while reducing its loss ratio. Signs are early and good for this.
Palantir’s valuation depends on their software being successful at generating incredible savings for enterprises. It also depends on their ability to roll out a product for SMBs that can be self-serviced. I own an e-commerce business and managing multiple SaaS systems (my e-commerce store, accounting, inventory management, customer analytics) is challenging. I’d love to have a unified dashboard as powerful as what Airbus offers. That unifying software later could be a lighter version of Foundry.
As a young investor (i’m 33 in 2021), investing in companies doing “hard-to-do” things can have asymmetric upside that warrants taking a flyer on.
Obviously not all bets will pan out, which is why I own a lot of other things within the portfolio.
*This is not investment advice. It is opinion. I am not a licensed investment guy.