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The case for buying the dip on Palantir

by Dissecting the Markets 3 months ago in investing
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While Palantir has relied on government contracts, it's going to source more growth from the private sector

The case for buying the dip on Palantir
Photo by Tobias Tullius on Unsplash

Palantir is a data-mining platform that helps government agencies and corporations analyze huge sums of data. The business model is a mix of both consulting and software as a service. When Palantir went public, the New York Times summarized Palantir's business model by saying:

"Customers pay for technology that hasn't been built; it owns the customized software that it makes and monetized it by licensing them to clients and can license that same software to other clients as well."

While Palantir is in the business of providing customizable software, since they own the technology and are able to license it to other clients, Palantir's business model is scalable. Few customizable software firms can scale like Palantir.

As for the software platform itself, here's a tweet that I made describing how game-changing Palantir's software is:

Giving "excel jockeys" the ability to great complicated software without being tech savvy creates immense value for clients. Employees are more empowered to add more value to the firms and agencies that they work for. At the same time, the customization that Palantir's clients get for their software are tailored towards their needs.

There are two main software platforms that Palantir has: Gotham and Foundry.

Palantir's Gotham platform is for government clients. This software platform is used mainly by US Department of Defense and other clients that deal with things like counter-terrorism. It's tailored towards users that want to organize data when conducting investigations.

Palantir's Foundry platform is for corporations as well as health agencies like the NHS in England. Foundry is designed to handle larger sets of data. Users of Palantir's Foundry platform include Merck, Morgan Stanley, Airbus, and Stellanis.

Palantir has other software platforms like Apollo, which utilizes both Gotham and Foundry. This product is specifically for users who use multiple public and private cloud servers.

Analysts have struggled to value Palantir because there's a debate on whether it should be valued as a software company or a lower-margin consulting business. Personally, I think that Palantir should be valued more as a software company because that's their main product and that's what they're best known for.

Growth Catalysts

There are many headlines that I see each week on Palantir getting a new contract with a different government agency. Sometimes I read about Palantir getting contracts from corporations, but that's less common. Analysts do see Palantir sourcing most of its future growth from corporate contracts through its Foundry platform.

A notable corporate client that Palantir recently got is Trafigura, one of the world's largest physical commodities trading companies. Palantir is making a software platform for carbon emissions calculations and for finding ways to improve supply chains. If Palantir creates a great software program for Trafigura, Palantir will be able to successfully license that same software program to other firms in the commodities sector. The carbon emissions calculation software alone can be licensed to many more businesses, especially if they're outside the commodities sector.

Another notable client, this time in government, is the U.S. Space Systems Command Battle Management Command, Control, and Communications. That government entity awarded Palantir a $175.4 million contract. Being affiliated to the US Space Force, Palantir will be able to benefit from the growing fiscal investment in the US Space Force.

Finally, Palantir is competing to get a contract from the UK National Health Service. That contract is worth 360 million British pounds. If Palantir gets that deal, their software will be managing the medical data of millions of patients.

The fact that Palantir continues to receive more business opportunities from businesses and government agencies helps Palantir grow its revenues. Assuming that Palantir continues to maintain their great track record, each new client means more recurring revenue for the business. Palantir is becoming a growing recurring revenue machine.

Conclusion

While Palantir's Gotham platform will be gaining huge contracts from various government agencies, investors should note that the growth for Gotham is very limited. There's only so many government agencies that Palantir can have a client. Because of this fact, analysts continue to emphasize Palantir's Foundry business as its major growth catalyst.

With Foundry, Palantir has a lot more clients that it can sign up. There are many companies out there ranging from large to small. While signing up small clients might not mean much today, overtime they can provide the majority of growth of a business.

Altogether, with a scalable business model and having one of the most advanced technology, Palantir is a great business to buy the dip on. Even if Palantir's business might have ethical concerns due to its involvement with surveillance capitalism and its business dealings with ICE (Immigration and Customs Enforcement), there are many great ethical businesses and government agencies that Palantir works with.

In the meantime, I assume that great investors will be capitalizing on the discount in Palantir's share price. At the same time, I could be wrong and the great investors are shorting Palantir.

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About the author

Dissecting the Markets

My views on markets, investment strategies, perspectives on events, etc. usually differ from the mainstream consensus.

*All views expressed in my articles are my own and should be considered opinionated

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