Palantir: the Tesla of enterprise software

Company quietly crossed 1B in rev last year, but we're in the early innings of compounding growth

While my small cap calls lately have been hit or miss, I’m returning to my roots by opening some new tech positions. This post is not investment advice, but really been admiring a company called Palantir. Some notes follow. They are unique, differentiated and most importantly not any of the sectors I refuse to open new positions in here. Not ad tech (you’re late) not biotech (sector has potential obviously but can’t catch a bid due to political and macro reasons, just too hard here) not energy (who knows what will happen) consumer (supply chains are crazy right now) nor crypto (lol). Rather, they’re a company that is in my opinion a key future platform for how the world operates effectively and have finally proven themselves.

PLTR has only been public a short while, and went IPO via direct listing which I actually love even though some on wall street dislike. Chart since IPO below, they’re only up about 150% from IPO price and currently trade in mid 20s (down from 40+ previously, blame the Wall Street Bet apes, who although do like to engage in pure gambling debauchery, this does not preclude the community from also having real investment ideas, too).

I believe this is a great entry point for a company that has taken their time getting to public markets and establishing themselves. Their software which I’ll get into further in a bit isn’t just managing things like customer orders or ad data: they are trusted with some of the most sensitive information on Earth. They’ve slowly been building a moat and I believe one which is durable for decades to come.

My friend Gannon shares his thoughts on the company in a post here. I love his short description of what they do:

In one sentence: Palantir is a company that builds software allowing organizations, private/public businesses, and governments to integrate data, decisions, processes, into one platform in an effort to answer complex questions quickly.

The last time I called a company the tesla of their sector, Twitter got mad, despite it going on to ~10x from there.

But I am going to do it again, this time not just in regards to future valuation but real potential. Palantir I believe will be viewed in hindsight as the Tesla of enterprise software and are going to be a massive disruptor in the space both today and well into the future. Their long game investment is about to hit stride and unlike Tesla which I sold too soon and was not ambitious enough on, I plan to be part of this one for the long term.

Like Tesla they’ve started upstream and worked on the ‘hard’ problems first (or in Tesla’s case, luxury/performance market) before going broader. PLTR already today powers key government agency operations, is used by hedge funds, banks, and financial services firms and notable clients include Merck, Airbus, Amazon, IBM, Ferrari and more. Not just quietly used by the largest and best run companies on Earth is also rumored Palantir helped find Bin Laden and even uncover Madoff …wild stuff:

Also like Tesla, their founder is iconoclast. That’s a good thing! Wall Street is still missing the fact that at this point, we need weird (and driven) people to think big. And founder-led at this level in tech is something you don’t see often not continue to win. I’ve admired Alex Karp, Palantir’s founder for some time but have only recently spent the time to review his talks, conference calls and videos. He is far more grounded than Elon (you have to be to run the type of company he does) but his passion and ambition is no less.

They trade at under 50B valuation currently, but the reason we are early is this is a growth company that is now at inflection point of proving that it deserves to be. I held off on owning the IPO but for this type of business to cross the billion $ revenue threshold which they did in 2020 I think the large company growth story is just getting started. They waited to IPO until the point they did for a reason [pre-IPO numbers followed by just public co revenue numbers]:

Comparison to Snowflake reads this out and why their business looks different …I believe PLTR is playing a much different and longer game than traditional enterprise tech firms.

Analysis of PLTR vs SNOW [thanks to @CompoundingBull on Twitter for the chart]

PLTR potential growth of new customers is a blue ocean, they’ve taken a very diff approach of purely focusing on large contracts to date, but are about to go faster

One thing I saw repeatedly in my time on the Google Analytics team and as a consultant is the importance of implementation work. Palantir has been written off by some as a “glorified McKinsey” …which is first of all completely untrue (McKinsey has 30,000 employees compared to Palantir’s 2,500) but even if that were the case, McKinsey has >10 billion in revenue today without actually being a software company as their core DNA. This is another reason some have held off on this name, similar to many writing off Tesla as “just a car company” early and so thought it must be valued similarly. But that turned out to be not the case. And unlike most software + services business, PLTR is committed to getting users up to speed, fast. The company has the correct sense of urgency here as I’ve seen time and time again if you don’t engrain enterprise software in operations of a team right away you likely never will.

I think the Palantir bet is simple: they are going to be the operating system for governments, intelligence operations, modern supply chain management, and soon even startup and growth company decision-making in a way that’s different from existing products and yes, actually giving normal people without phds the advantage of sophisticated AI tools. They started with the hard stuff, similar to how Tesla started with the luxury market and are now starting to move downstream. The approach is counter to how most software is developed, and actually while the services aspect is important it of course becomes less so with the smaller contracts.

Alex, PLTR founder & CEO, made the following comment in a recent interview:

“There is no reason this company shouldn’t be 20x bigger.”

While typically such statements are audacious and perhaps grandiose, I genuinely believe him. Note he carefully worded this, he is not making a claim that they will grow 20x, he’s challenging his team that there’s no reason they cannot be. Could they be a trillion $ company? I think that is ambitious. But a 400-500B $ company? It’s well within the realm of possibility. But for certain, the future we will see more trillion $ companies, and all will be software/cloud. Why couldn’t a pure B2B/enterprise software play get there?

Palantir’s stack for government and intelligence

The US Army recently awarded Palantir an $823 million contract to enable an intelligence data fabric and analytics as part of an effort to modernize legacy battlefield intelligence system. Palantir has been (rightfully) under the radar to share their software but a quick video shows the power, scale and trust of what their teams have built over the last decade. These contracts are not given lightly, and once a technology is engrained in the function of the largest operations on Earth it is likely they will continue to be used (massive contracts end up being lindy). Quick video on Gotham if you haven’t seen it in action, it’s amazing stuff, like sci-fi but real life:

Further, Nato has just launched an AI strategy and $1B fund as defense race heats up. And Palantir holds keys to the future of how defense, intelligence and governments will operate. Do we think global conflict escalation is backing down anytime soon?

I sense not, and Palantir was built for such times.

Although even in times of peace, the right processes, teams and technology in place are critical to maintaining such conditions. This makes Palantir a rare opportunity to both hedge against global conflict but also share in the growth of doing a better job managing it.

Making modern supply chains work

You’ve been hearing a lot about broken supply chains lately? PLTR is now my favorite investment to address them (now and into the future).

Palantir Foundry addresses the fundamental challenge most supply chains face by building a digital twin of the entire supply chain, from the hand of the supplier to the hand of the customer. This digital twin is then directed at solving discrete supply chain challenges by connecting analytics and operations. It’s about being not only smarter, but better. Building the supply chain digital twin and wielding it towards common supply chain problems can be done in hours in Palantir Foundry, a process that may take years in other software.

From Palantir:

Inflation fears are real, as many manufacturers are seeing raw material prices increase on the inbound side of the supply chain. In order to protect margins, organizations are starting to think about raising prices, yet most don’t have the ability to understand at a granular level how much each unit of production costs to produce. This is because costs are calculated in silos that do not lend themselves to effectively calculate the cost of production for an individual SKU or item. This is further exacerbated by the reality that it can take a long time for costs to actually propagate through a supply chain. As a result, when taking price increases on finished products, companies often do so in a blunt-instrument approach across a whole range of products without granularly thinking about each SKU separately.

In Palantir Foundry, users can quickly and easily allocate costs from large aggregations, such as warehousing costs or labor costs, down to the individual SKU and item level. This enables operators to quickly understand the exact cost of goods sold for each item in the network, as well as how the cost accumulated at each atomic step in the supply chain, from procurement to manufacturing to transportation. This granular understanding enables operators to deeply understand exactly how inflation impacts margin for each and every SKU. Taken in conjunction with understanding of market share, elasticity of demand, and so on, operators can make finely tuned decisions on pricing and contracting to protect margin without sacrificing market share.

For several of their sectors, large tech companies don’t want much to do with what Palantir does, nor have they gone through the efforts to ensure systems that adhere to strict data-privacy standards on the enterprise side that PLTR has. I also think the optics are wrong as we have seen many people both internally and externally have vehemently opposed cooperations beyond handing over criminal data when legally obliged to do so. For that reason, tech companies with both consumer and enterprise operations can never go where PLTR does.

These are just some of PLTRs business units and use cases you can explore the others on their site (they are working on something for everyone not just enterprises but startups and growth companies as well now). As it stands today I’ve not seen a single company use their data as well as they could have. If PLTR is able to solve this in better, more actionable ways, their growth is basically as far as they want.

I also wouldn’t bet against the ex Paypal mafia, Peter Theil (largest shareholder and also founder) is playing a completely different game than everyone else. Alex is cut from the same cloth. They moved operations out of San Francisco recently to make Denver their headquarters. Controversial but they saw what was happening there and decided to be nimble and create a better and likely more stable home for the company. I respect a company able to make such difficult decisions especially during tough times.

Anyway, I think at this point PLTR has proven themselves from a technology, leadership and as an investor most importantly revenue growth standpoint. The fact that they are somewhat “secret” (I don’t really think they are, they’re just cautious) is not a red flag it shows they’ve been adults in the room which is what you would want for company with products used by intelligence agencies. In my view this is a company that’s a vital part of the future, but still valued like that is tentative or growth is baked in. I don’t think that is the case here in the slightest, and plan to be a long term holder of this company - their next decade is bright.

Disclosure: the author of this post is long $PLTR shares