Our Government Is Spying

An in-depth stock analysis on Palantir Technologies Inc.

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Picture by BNN Bloomberg | Source

Greetings fellow investor,

I apologize for the late post. There were some issues with writing and posting that I won’t burden you with. The good news? I’m only 3 days late.

Welcome to Stock Analysis, where I cover the all-around details of public stocks twice a month, every other Wednesday, exclusively for paid subscribers. My goal is simple: to save you time on research, provide informed stock picks, and help you better understand stock analysis.

There’s a scene in The Lord of the Rings where Gandalf tells Saruman how the Palantír (one of the seeing-stones) is corrupting him, exposing him to danger by letting Sauron conquer him with evil through the stone (more on this below if you’re not familiar with The Lord of the Rings). It turns out that one of the largest data technology companies in the world took its name from this exact stone in the J.R.R. Tolkien story. The same company that was funded and currently works to help U.S. intelligence manage and learn from its data.

This company, being Palantir. Palantir is currently a $155 billion global technology behemoth, with its stock price fuelled by the AI craze. Since 2022, its shares have surged over 500%. You may have seen its name around social media (as I have), where investors and followers of the stock have been making overly bullish posts. But what does this company do? How does it make money? More importantly, is its valuation justifiable, even accounting for its high free cash flow growth? Buckle up, today’s a long one.

Sources for all paid analyses are free, here. Glossary of financial terms at the bottom.

Let’s get into it. (32 min read)

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Today at a glance:

1. The seeing-stones (history)

2. Business model & analysis

3. Management quality

4. Stock performance & financials

5. Risks, moat & competition

6. Growth aspects

7. Valuation

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The seeing-stones (history)

Picture by Game Rant (edited by author) | Source

One of the best ways to locate great, down-to-earth founders of a high-growth, innovative technology company is if the backstory of the company’s name is creative. Not only is Palantir’s name creative, but it has possibly the most intriguing history I’ve written about on any business to date, while also being the least detailed history write-up I’ve ever wrote.

Founding

Screenshot | (Google Query: “Palantir founders”)

Palantir’s official founding was in 2003 by Peter Thiel, after the now-billionaire venture capitalist left PayPal. Thiel created the company with the goal of countering terrorism threats after 9/11. Eventually, Thiel would recruit colleagues and friends of his: Nathan Gettings, Joe Lonsdale, Stephen Cohen, and Alex Karp (who would soon take the role of CEO). Together, they worked to grow a company designed to manage and streamline large amounts of data. Peter Thiel at the time had amassed a $55 million fortune from his role as co-founder of PayPal and brought his venture capital expertise to the forefront of Palantir. (Many of these founders were wealthy and/or had wealthy connections, so there is sadly no “rags-to-riches” story today.)

All of these men, including Thiel, were motivated by the idea that government agencies were not making the best use of their available data and information. It was a simple idea they believed they could solve, and thus, Palantir was born. Palantir’s name comes from the “seeing-stones” in The Lord of the Rings trilogy, which, in the story, were a group of stones called the Palantíri that gave whoever held them the ability to see and uncover anything they desired. (Hence the name “seeing-stones.”) Palantir’s product was a piece of software that had the potential to help organizations unlock efficiencies, predict trends, and uncover insights from data using algorithms and AI that would otherwise not be known. Palantir’s correlation to this fantasy fiction ball, let’s say, was based on its ability to uncover the hidden and see what not many can see using data. Fun fact, Palantir’s logo closely resembles what a Palantíri looks like.

Now, as mentioned, Palantir’s original founding was based on the idea of helping governments manage their data more efficiently. In fact, the CIA (Central Intelligence Agency) was an early investor in Palantir via its venture capital subsidiary In-Q-Tel. Consequently, the first product released by Palantir in 2008 was one targeting government data management, under the name Gotham. This was a customizable subscription platform (both in price and product offering) helping government agencies by facilitating the tracking and analysis of intelligence data. Many of Palantir’s first clients were the FBI, CIA, and even the U.S. Department of Defense. Eventually, this product would be so beneficial to these government agencies that it helped in the success of preventing terrorist threats during the American-Middle East tensions post-9/11.

By this time, Palantir’s founders knew they could be doing something bigger. Governments are consistent, reliable, and they pay well over a long period of time, but private and public companies… now that’s where the dollars are. So, from here, more work was focused on leveraging Palantir’s success with government agencies to create what would be known as Palantir Foundry. This was a product focused on commercial clients, and it applied to a wide variety of commercial industries. Finance, healthcare, energy, manufacturing. The thought process was that companies have lots of data, and streamlining data would make them more money… and what company doesn’t want bigger profits?

This new product was a perfect fit, and officially, with Gotham and Foundry, Palantir’s core business model was now complete. By 2015, eleven years after its initial founding, Palantir reached a $1 billion valuation.

Palantir would remain focused on its two main products as the years went on (Gotham for governments; Foundry for commercial clients), and its partnerships continued to rise. Their early success in commercial markets and continued demand for Palantir’s government product gave them influence and dominance in the data analytics sector they operated. Clients included Boeing, Morgan Stanley, and Fiat Chrysler (now Stellantis). Palantir’s ability to assist organizations with their vast amounts of data was a clear working strategy, and companies resonated with it. This would quickly become a cornerstone of their value proposition.

Up until this point, Palantir had operated very secretly. As many of its current customers were high-profile government agencies, being open with its operations wasn’t a priority for the company. That is, until its IPO.

In 2020, after years of speculation, Palantir officially went public on the New York Stock Exchange through a direct listing, valuing the business at over $22 billion. Since going public, Palantir has continued to make significant moves in both the public and private sectors and continues to uphold its dominance in its own niche data analytics industry. Palantir even started expanding its reach globally, offering its products to foreign governments and even large multinational corporations. (Palantir only works with businesses and institutions that align with the company’s values. So far, they’ve rejected the Chinese and Saudi Arabian governments from using their services.)

In recent years, Palantir has focused on expanding its offerings to include artificial intelligence (AI) and machine learning capabilities (more so than they already had). As data becomes more and more valuable to businesses and organizations around the world, Palantir’s role in this revolution plays a larger and more important role. The company has continued its commitment to innovation, particularly in AI and machine learning as I explained, and continues to position itself as a leader in the ever-evolving world of data analytics. (More about the business and competitive advantage later on in this post.)

Palantir as a company begins on a secretive journey from starting as essentially a government contractor to becoming a global player in data analytics. As Palantir continues to grow, its influence with governments and companies around the world across industries is expected to increase along with it. PS: Because of Palantir’s secrecy over its history due to working with intelligence agencies, much of what I can find about its history is vague.

Business model & analysis