Palantir May Be Able To Float at a Record Valuation on the 23rd of September If Snowflake’s (NYSE: SNOW) Market Debut Is Anything To Go By
Palantir, Peter Thiel’s big data analytics venture, has become a familiar buzzword in the halls of finance as the company gears up to go public on the 23rd of September.
We noted in a previous post that Palantir is preparing to float 244 million (244,233,967) Class A common shares in its direct listing scheduled for the coming Wednesday. In this backdrop, there is a healthy amount of interest for Palantir’s IPO in financial circles, particularly given the spectacular trading debut by Snowflake (NYSE:SNOW) on the 16th of September. As an illustration, relative to its IPO at $120, Snowflake stock commenced trading at $245 and then went on to create an intraday high of $319. Even though the stock has since then retreated, it is still a whopping 100 percent above its IPO price, based on the stock’s closing price of $240 this Friday.
We had detailed in an earlier post that Palantir should be valued at a substantial discount to its rumored $20 billion valuation. In order to support this view, we had noted:
“The U.S. Software and Programing Industry’s TTM (Trailing Twelve Month) Price-to-Sales (P/S) ratio currently stands at 9.04x, as of Q2 2020.”
We had then pointed out:
“Palantir’s valuation, based on its FY 2020 estimated revenue, is a mere $8.7 billion if the industry revenue multiple of 9.04x is applied.”
We had also identified Palantir’s extremely narrow revenue base as a cause of concern. The company is increasingly relying on government contracts to drive its top-line growth. As an illustration, the proportion of revenue that the company generated from these government contracts jumped from 45 percent in 2019 to 53.5 percent during H1 2020. Moreover, around one-third of the company’s total revenue is derived from just three customers. This is astonishing given that the company spent 61 percent of its total 2019 revenue on sales and marketing.
However, despite the euphoria-sapping factors listed above, Palantir can pull off a very successful IPO. First, as stated earlier, Snowflake’s public market debut has served as an effective illustration of the market’s current voracious appetite for buzzword tickers. Moreover, in the wake of Snowflake’s epic surge following its flotation, critics slammed the deal underwriters for essentially “leaving the money on the table” by underpricing the IPO. This, however, should not be the case with Palantir as the company has opted for a Direct Public Offering (DPO). In this process, a company forgoes the safety net provided by the deal underwriters – usually a consortium of investment banks – and offers to the general public only existing outstanding shares. This is in direct contrast to an IPO where new shares are created, underwritten, and then sold.
Additionally, there are a host of intrinsic factors that make the case for Palantir’s successful IPO. First, the company enjoys a well-developed and established primacy in its niche market. Second, the company relies quite heavily on government contracts which are, by nature, quite sticky. Third, even though Palantir has yet to generate a profit, its total addressable market is likely to continue expanding with the prevailing secular trend that favors AI tools for surveillance, big data aggregation, etc. To this end, the company is expected to earn around $1 billion in revenue in 2020.
In light of the supporting factors detailed above, the law of probability favors Palantir. Investors should, therefore, prepare for a bumper public offering this Wednesday.
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