Commercial Contracts Will Keep Breathing Life Into Palantir

Palantir bears often point to the lack of commercial contracts, but the situation is changing

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Sep 04, 2022
Summary
  • Negative macroeconomic conditions have weighed heavily on Palantir.
  • Investors are principally concerned with the results of Palantir's foundry offering, which is engaged in providing services to commercial clients.
  • Despite recent headwinds, the stock may still be a good opportunity.
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Palantir Technologies Inc. (

PLTR, Financial) develops analysis software. Founded in 2003, the company has since seen massive growth.

Its primary focus is helping organizations make sense of large data sets and its software is used by governments, corporations and non-governmental organizations worldwide. Palantir has been particularly successful in winning contracts with the U.S. security establishment. Its products are used by the CIA, FBI, NSA and other agencies. The company has also been expanding its reach into the corporate sector, forging deals with banks, hedge funds and retailers.

Before this year, Palantir was a poster child for growth stocks. However, most of the growth stocks in the market have been impacted by high rates of inflation, interest rate hikes and supply chain issues. This recent slump has led to billions of dollars being wiped off the market caps of several growth companies. Palantir is no different. However, there is a company-specific reason why the stock is not doing as well as it should, and that has to do with the lack of commercial clients.

The data analytics company operates four segments: Palantir Gotham, Palantir Apollo, Palantir Metropolis and Palantir Foundry. Investors are principally concerned with the results of the foundry business, which is engaged in providing services to commercial clients. Palantir's customer count for the segment grew from 34 customers to 119 in the second quarter, year-over-year growth of 250%. Regarding total dollar value, revenue rose 46%, which contrasts nicely with the 26% year-over-year increase in total revenue.

Historically, Palantir has relied on government contracts and a few other sources of revenue. However, the situation is evolving rapidly. It recently signed commercial contracts with clients in various industries- including health care, finance and retail. The company aspires to create a hybrid funding mix created by the intersection of private and public sources. The move comes as Palantir faces increased competition from other data analysis software providers. Considering the recent success in courting commercial clients and the steep selloff, Palantir looks like a potentially attractive opportunity for aggressive investors.

Palantir's recent deals show it is not slowing down

The performance over the past few months indicates Palantir is not slowing down and shows no signs of stopping from gaining more commercial clients. The clients come from several backgrounds, which shows the company's dominance in several areas of business.

The latest and most exciting partnership is with online mortgage company Better.com, one of the fastest-growing homeownership companies. Its mortgages, aggregated under one roof, have funded over $100 billion in home financings. The partnership is set to automate 70% of the mortgage process with the new platform, Tinman Marketplace. It is a much-needed lift to Better as last year, CEO Vishal Garg had various legal liabilities and corporate governance problems to deal with.

MCI Onehealth also signed a three-year commercial agreement with Palantir, which will provide artificial intelligence capabilities for improving patient outcomes and addressing issues in health systems worldwide. MCI's clinical intelligence service relies on Palantir for its back end, which helps find and use real-world insights to create improved partnerships. Palantir has worked with major organizations in the health care sector in the past, most notably with the U.K. health care system, National Health Service. Hence, the contract builds on its previous experience.

Finally, Beckett Collectibles signed a deal with Palantir, which will provide Beckett with the back-end management platform for all of its collectibles, from physical cards to non-fungible tokens. The integration of legacy systems into Palantir Foundry is already making it easier for customers to access decades' worth of card data, comics and other collectibles.

There are several more contracts Palantir has won in recent months. The reason for not discussing them is that most are extensions of deals the company has with government agencies. While government contracts offer lucrative, smooth recurring cash flow, investors are more interested in commercial contracts because they attract less negative press. On that end, Palantir is doing well.

The dip in Palantir is related to an accounting matter

One of the main reasons Palantir has not done well in recent months is its weak guidance for 2022. The company has been working hard to improve this, though, and it is important to be aware of some additional details on the matter.

If Palantir is closing many high-value deals, why is its forecast for earnings so low? The management team argues that the shift in currency rates is only partially to blame for declining revenue. It believes the timing of government contracts are also playing a part. Government contracts can be unsteady since they do not provide equal payments across all periods. This can lead to above-average revenue recognition in some periods and below-average revenue recognition in others.

The company is still expected to generate 23% revenue growth for this fiscal year, but some serious headwinds are in play. However, all things considered, the guidance for the year is respectable.

Takeaway

Despite the recent headwinds, one cannot deny the allure of Palantir. Government agencies and large companies can mine and analyze data more efficiently, with many of its clients including intelligence agencies.

Palantir also has several competitive advantages. First, its technology is mission-critical for its clients. The software is used to track down terrorists, prevent cyberattacks and respond to natural disasters.

Second, Palantir has a large and growing addressable market. Its technology can be used in any industry where data is critical, including health care, finance, manufacturing and logistics.

Third, the company has been experiencing rapid growth, which is great for growth investors.

Finally, Palantir has a talented management team led by co-founder and CEO Alex Karp. Karp is a visionary leader who has masterfully navigated Palantir through multiple controversies while delivering strong financial results.

In summary, Palantir could be a great investment because of its mission-critical technology, large addressable market, profitability, strong balance sheet and talented management team.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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