Palantir's huge potential

What does Palantir (PLTR) do?

Palantir engages in government contracts to build and deploy software platforms for the intelligence community in the United States to assist counterterrorism investigations and operations. If it had stayed this course, the growth will be limited. But lately, Palantir has started to engage with enterprises in the B2B sector as well as offering artificial intelligence solutions. The potential is huge.

Why is there Massive cost in Sales and Marketing

In 2020, Palantir generated a little more than $1 billion in revenue and spent $1.3 billion in sales and marketing. Now you may think that is a mismanagement. That is however not the case, it is essential to spend a substantial amount on sales and marketing due to huge competition in the software industry. Building the software for clients does not cost much and the only other cost is labor, it is more important to engage a customer and keep the customers for the long term.

Business model

Palantir's business model happens in three stages. In the first phase, they earn $50,000 to $100,000 per customer, but in the second phase, they lose about $500,000 per customer. The reason is putting tons of effort and resources into the initial phase of onboarding a customer. This is their standard sales process. In the final phase, an average customer in the long term generates about $63 million. This makes up the high cost of the initial phase.

Valuating the business

Palantir’s management is forecasting four times revenue in 2025 which makes it about $6 billion. Using Microsoft’s Free Cash Flow(FCF) yield of 2.6% as a benchmark, we use $6 billion divided by 2.6% works out to a market capitalization of $230 billion which is five times today’s market capitalization meaning the stock is worth around the range of $120. It might seem too optimistic, let’s say we half the management’s estimate on the revenue we still get the stock worth $60. This is roughly three times the share price today.

Investing in the stock

In the short run, the stock movement is still volatile. Investors might be looking for signs for more contracts secured. The long-term returns seem rewarding.

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