Palantir: A Deep Dive Assessment For Long-Term Investors

Research Thesis

In thefirst part of this investment research for Palantir Technologies Inc. (PLTR), I have explored the qualitative aspects of its business model, strategy, economic moat, product offerings, real business case examples, and applications of its three platforms.

In the second part of my research, I dive into the company's leadership, culture, risk assessment with particular emphasis on the Stock-based compensation (SBC) and a detailed company valuation through the application of a Discounted Cash Flow (DCF) model.

It is evident that the stock hype is over, and PLTR has plunged since its direct public offering (DPO) in September of 2020 and from all-time-high levels. Nevertheless, a performance benchmarking approach suggests outperformance compared to ARK Innovation ETF (ARKK), but not too far away from the SPDR S&P 500 Trust ETF (SPY). Undoubtedly, a prolonged pullback of PLTR offers long-term investors the opportunity to load up shares at undervalued prices, contributing to higher long-term returns.

Data by YCharts

I generally avoid investments in companies that have recently gone public, i.e., IPO/DPO, due to the elevated price caused by the hype and lack of historical information and visibility. Moreover, from the DPO date and onwards, the stock fluctuates rapidly with high volatility caused by the market participants fighting to determine a fair value for the stock. In addition, the expiration of the lock-up periods provides an exit point for earlier investors, which further suppresses the stock price in the short term. In the meantime, I consider this period a 'knowledge' phase to familiarize myself with the company while being patient until the hype fades away and insider selling reaches a more normalized and sustainable level.

Despite the high pressure on growth stocks in anticipation of interest rates hikes, the global geopolitical tensions are further dragging down prices and have put on sale some of the best growth names thatI have been researching for a while. As a result, sky-high valuations of high-growth stocks are now trading at more reasonable levels, and eventually, some qualify for investment. Palantir is one of them, and it is already part of my long-term concentrated portfolio with at least a four to six-year investment horizon.

Introduction - The Narrative gets Stronger

Palantir is often compared with other big data, analytics, and AI companies. Other companies offer a more static approach to data and AI solutions, whereas Palantir's platforms are differentiated from the competition as they provide more customized, flexible, and forward-looking solutions that can turn messy, unstructured, and structured data into charts, histograms, maps, and other forms that enhance visualization by humans across organizations.

InPart 1of my investment research, I expanded on the company's 'trojan horse' strategy that already delivers meaningful results allowing the company to accelerate the customer reach at a low cost in the short term. Karp, in hisrecent letter, has highlighted the following:

Every large organization, in every industry and sector in the world, is becoming a software company, willingly or otherwise. There are no goods or services or government today without software.

As a result, the demand for software platforms that allow an institution to harness the productive capacity of its human capital and whose value persists and compounds over time has never been greater.

To that effect, as organizations across the globe become more digitalized with more data reserves, Palantir's best-in-class platforms create an 'alpha' for organizations and institutions.

1. Leadership, Culture, and Talent

Surprisingly, the captain of Palantir, Alex Karp, does not come from computer science, AI/ML, or data science background, whereas he holds a bachelor's degree from Stanford Law School and a Ph.D. in philosophy in Frankfurt, Germany. Furthermore, Karp comes from a mixed-race background from parents he described as hippies who participated in political protests. Undoubtedly, Palantir's CEO early years and family environment shaped his character and subconsciously formed his ideological beliefs, such as protecting and fighting for your privacy and civil liberties.

On the contrary, the co-founder Peter Thiel, the Chairman of Palantir, was raised by Christian parents, and he is an independent but controversial thinker with libertarian beliefs. Not surprisingly, Thiel supported Trump's presidential race, while Karp supported Clinton. Despite the contradictions, both bring to the table a balanced but controversial leadership approach with complementary skills, vital for Palantir's success.

Despite the CEO's limited tech background, he has successfully navigated the firm for almost two decades, and his track record proves his charismatic approach to closing mega deals,recruiting top talent, and creating 'alpha' for organizations and institutions. Moreover, since Karp took the helm of Palantir, it is evident that his beliefs are shaping the company's decision-making. For instance, when theydecided to DPO, they avoided an IPO and skipped issuing shares to Wall Street, allowing the average investor to participate.

Interview Series: Palantir CEO Alex Karp (Palantir)

Palantir is a controversial and unique company that can resist the institutional imperative due to its low exposure to Wall Street and high participation by the public, accounting for over 50% of shares outstanding. The company's capital structure includesmulti-class common stock with three classes of shares A, B, and F. The latter gives its holders superior voting rights of 10 votes per share, allowing the founders to control up to 50% of the total voting power. Therefore, the company's ownership structure is shareholder-friendly as no institution can exert significant influence over Palantir's management, and founders can block any hostile takeover or unfavorable resolution.

PLTR Ownership Structure

Palantir's long-term success is based on its talent

With more than 400 reviews and a 78% CEO approval, Palantir achieves a remarkable4.1 score on Glassdoor ratings. Not surprisingly, the compensation and benefits benchmark receives a 4.5 rating due to the high SBC to attract top engineering talent. Most negative reviews result from the long hours and high pressure with nearly non-existent work-life balance, especially for employees with families who need to be constantly alert in this dynamic and fast-paced environment. However, on the positive side, Palantir has established a name in the industry as an employer with great benefits, excellent pay, and, most importantly, a place where ambitious individuals can work with the brightest minds.

Glassdoor Reviews

Indeed, other products in the market are developed on the assumption that organizations are going to be more reliable and static. In contrast, Palantir builds solutions for a more complicated and dysfunctional world by attracting and retaining top engineering talent. To that effect, Palantir shapes the industries, and its focus is clearly not on sales but most importantly on product development, as the CEO noted in the Q4-2021 earnings call:

We're in the market to hire aggressively across Palantir, honestly, mostly not salespeople because we believe we live and die based on our ability to build products of tomorrow delivered today.

Clearly, the company's long-term talent acquisition strategy is in the engineering and science field, but now having built three core platforms that are used by the largest organizations and institutions in the world, it's about time to accelerate adoption through a strong salesforce.

For 2022, the CEOhas highlighted that they currently employ 150 salespeople and are hiring another 200 people soon. At the time of writing, the company has a total of 189open positions listed on its website, with a large portion of them being in the field of business development (22%), Engineering (13%), Finance (10%), and Sales (7%).

As of year-end, the company had2920 full-time employees, with a little bit less than a third of them being outside the US. The open positions account for around 6.5% of the current workforce, and total vacancies are expected to increase throughout 2022. Last but not least, it is remarkable that the company achieves a $528 thousand revenue per employee for 2021, an 18% YoY growth, and a figure substantially higher than most of itsclosest competitors.

Palantir Open Positions$Palantir Technologies Inc.(PLTR)$ $Palantir Technologies Inc.(PLTR)$