Palantir Technologies (PLTR) intends to list its Class A shares in a direct listing of its Class A common stock, according to an S-1 registration statement.
The firm provides defense and intelligence analysis software to the U.S. government as well as integrated data capabilities to major enterprises.
PLTR has grown its topline revenue and gross profit, but has swung to operating losses and cash burn.
Denver, Colorado-based Palantir was founded to develop two software platforms:
- Palantir Gotham – defense and intelligence analysis software
- Palantir Foundry – central operating system for siloed data
Management is headed by co-founder and Chief Executive Officer Mr. Alex Karp, who was previously a graduate of Stanford University and Goethe University in Frankfurt, Germany.
Below is a brief overview video of an interview of Palantir’s CEO Alex Karp:
Source: CNBC Television
Palantir has received at least $2.1 billion from investors including Founders Fund, SOMPO Holdings, Disruptive Technology Solutions, UBS, and 8VC.
The firm’s software is used by companies and governments in 36 industries and in over 150 countries.
Palantir sells its software via an in-house direct sales force primarily to large enterprises and western governments and allies. The company does not sell its software to adversaries of western governments.
Sales and Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose significantly to 0.8x in the most recent reporting period.
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. PLTR’s most recent calculation was 14% as of June 30, 2020, so the firm has some ways to go in this regard.
According to a 2020 market research report, the global market for defense IT spending was an estimated $81.3 billion in 2019 and is expected to reach $98.8 billion in 2026.
This represents a forecast CAGR of 2.8% from 2021 to 2026.
The main drivers for this expected growth are continued and increasing cyber security threats as well as changing intergovernmental relationships and regional and global threat estimations.
Major competitive or other industry participants include:
- Leidos (LDOS)
- Accenture (ACN)
- IBM (IBM)
- General Dynamics (GD)
- BAE Systems (BAESF)
- Oracle (ORCL)
- SAP (SAP)
- Microsoft (MSFT)
- Amazon (AMZN)
- CACI International (CACI)
Management says it is ‘fundamentally competing with the internal software development efforts of our potential customers.’
Palantir’s recent financial results can be summarized as follows:
- Growing topline revenue at an accelerating rate
- Increased gross profit and growing gross margin
- A swing to operating losses
- Sharply increased cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
Source: Company registration statement
As of June 30, 2020, Palantir had $1.5 billion in cash and $1.2 billion in total liabilities.
Free cash flow during the twelve months ended June 30, 2020, was negative ($63 million).
Palantir intends to list its Class A shares in a direct listing on the NYSE. The firm is not raising capital as a result of the transaction.
The company will have three classes of shares:
- Class A common stock – sold by selling shareholders to the public, one vote per share
- Class B stock – held by existing investors and senior management, ten votes per share
- Class F stock – control stock for the company founders, variable number of votes per share
Assuming a successful direct listing at the most recent private sale assumed price of $11.50, the company’s enterprise value would approximate $26.3 billion, excluding the effects of underwriter over-allotment options.
The float to outstanding shares ratio would be approximately 11.62%, if all registered shares were sold in the direct listing.
Management describes the direct listing Use of Proceeds as follows:
Registered Stockholders may, or may not, elect to sell shares of our Class A common stock covered by this prospectus. To the extent any Registered Stockholder chooses to sell shares of our Class A common stock covered by this prospectus, we will not receive any proceeds from any such sales of our Class A common stock.
Management’s presentation of the direct listing is available here.
Advisors on the direct listing include Morgan Stanley, Credit Suisse, Goldman Sachs, Allen & Company, RBC Capital Markets, Citigroup Global Markets, Jefferies, HSBC Securities, SG Americas Securities, CIBC World Markets, Scotia Capital and MUFG Securities Americas.
Palantir is seeking a direct listing of its Class A shares but will not receive any proceeds. The Class A shareholders may choose to sell or not based on their individual preferences.
The firm’s financials show significant topline revenue growth and increased gross profit.
However, PLTR has swung to operating losses and significant cash burn in the most recent reporting period.
Sales and Marketing expenses as a percentage of total revenue have been dropping; its Sales and Marketing efficiency rate has risen significantly in the most recent reporting period.
The market opportunities for providing both security database software as well as integrated data software are large and expected to grow at a substantial rate.
Recent IPO company Snowflake (SNOW) also targets the enterprise IT market through integrating various data silos, so Palantir appears to be in a sweet spot in the industry going forward.
As to valuation, compared to SNOW’s current public price indication, at its most recent private sale price of $11.50, PLTR would be a comparable bargain.
My opinion on PLTR is a buy at up to $15.00 per share, which represents a reasonable valuation bump from its most recent private valuation.
Expected Direct Listing Date: September 23, 2020.
Glossary Of Terms
(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)
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