Palantir Should Be Valued at a Substantial Discount To Its Bandied About $20 Billion Valuation
Palantir Technologies, Peter Thiel’s software company that specializes in big data analytics, has become a subject of intense financial interest as it gears up to go public. As one of the biggest equity listings of recent times, the company’s prospects and valuation necessitate a thorough probe.
Bear in mind that Palantir has confidentially filed for an IPO and its financial statements have not been publicly released. Nonetheless, publications such as the New York Times and TechCruch were able to obtain the pertinent S-1 filing. In a bombshell development, the document showed that Palantir has never been profitable despite having commenced operations nearly two decades back in 2003.
According to the data available from PitchBook, Palantir has raised around $3 billion in cumulative funding. The last fundraising round valued the company at $20 billion. In this backdrop, it is crucial to critically examine Palantir’s proclaimed valuation given the newly revealed caveat of a lack of profits.
Dissecting Palantir’s Valuation
For this analysis, we will use the revenue multiple method that is frequently used to value private companies. The table below lists the company’s annual revenue since 2016:
|H1 2020||$481 million||Source|
|FY 2020 estimate||$962 million ($481 million*2)||Interpolated|
|2021 estimate||$1.089 billion||Interpolated|
We noted in a previous post that Palantir was expected to earn a revenue of around $1 billion in 2020. Based on the current information, that eventuality looks increasingly likely. In the table above, Palantir’s FY 2020 annual revenue is interpolated from the revenue that the company generated in the first half of 2020, based on the S-1 filing. The FY 2021 revenue estimate was obtained by applying the average annual revenue growth rate of 13.249 percent (computed for the 2016-2020 period) to the revenue estimate for FY 2020.
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 will use this metric as the benchmark for computing Palantir’s valuation:
|Industry TTM P/S ratio||9.04x*|
|Palantir's Valuation based on FY 2019 revenue & Industry P/S ratio||$6.71 billion|
|Palantir's Valuation based on estimated FY 2020 revenue & Industry P/S ratio||$8.7 billion|
|Palantir's Valuation based on estimated FY 2021 revenue & Industry P/S ratio||$9.84 billion|
As is evident from the table above, 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.
The chart below presents an alternative method of viewing this dynamic. Here, we have computed the implied P/S ratio for Palantir on the basis of its bandied about $20 billion valuation:
(All figures represent P/S multiples)
If FY 2020 revenue estimate is used, Palantir’s P/S ratio computes at 20.79, implying a premium of 129.98 percent relative to the current industry-wide P/S ratio of 9.04!
In order to add further context, we will examine the current 2020 TTM P/S multiples of Palantir’s major sector peers:
(All figures represent P/S multiples and have been sourced from Koyfin)
As is clear from the above chart, out of Palantir’s major sector peers, only Adobe has a similarly inflated P/S multiple. Given that Palantir has never been profitable in its entire corporate life that spans nearly two decades, prudence demands that investors exercise a substantial quantum of caution, particularly, if Palantir does manage to float at an evidently inflated valuation of around $20 billion.
Another cause of concern is Palantir’s extremely narrow revenue base. 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.
The purpose of this analysis is not to dissuade investors from gaining an exposure to Palantir as, for all intents and purposes, the company remains a promising enterprise in its field. Rather, this analysis is only intended to stress upon the need for caution. Investors should exercise due diligence and weigh the company’s valuation based on carefully calibrated metrics.
The writer does not currently possess any equity exposure to Palantir's competitors