The mysterious Palantir IPO is expected sometime this year. And it's likely going to be one of the most valuable public offerings of 2019.
While it will get plenty of attention, we don't advise investing in the Palantir IPO.
Palantir is a data mining company, but much of its value is shrouded in mystery. And while the company shows promise, IPOs can be risky investments for retail investors.
When it comes to IPOs, institutional investors are the ones who get in first. This means when retail investors can finally buy in after shares start trading, they're often buying a stock that is significantly overvalued. And since Palantir's valuations are spotty at best, this means it has the potential to be even more volatile.
While we recommend not investing in the Palantir IPO, we have another way for retail investors to profit.
In fact, we have a backdoor play that will capitalize on the interest and markets of Palantir without worrying about the volatility.
Palantir Is All About Data
Sixteen years ago, Palantir was co-founded by Peter Thiel (PayPal creator), Nathan Gettings, Joe Lonsdale, Stephen Cohen, and Alex Karp. The company built off of PayPal's fraud recognition software as a way to prevent terrorism worldwide.
It struggled at first to find interested investors. But eventually, it received $2 million from the CIA's venture capital arm, In-Q-Tel.
Several years later, Palantir played an instrumental role in foiling a cyber-espionage plan by China. Using the networks "Shadow Network" and "GhostNet," China had been spying on over 100 different countries.
And according to a TechCrunch leak, Palantir's clientele consists mostly of U.S. government agencies, some of which are the Air Force, West Point, the Marines, SOCOM, the NSA, the FBI, the CIA, the CDC, and the Department of Homeland Security.
In 2016, Palantir signed a $222 million contract with SOCOM in order to help the organization gather intelligence. And while that sounds broad, Palantir's services all revolve around analyzing and mining data for intelligence.
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The easiest way to explain data mining is by looking at Amazon.com Inc. (NASDAQ: AMZN). Let's say you're into fishing and buy a fishing rod off Amazon. Then, you go back and you buy a bait and tackle box. A couple of weeks later, you decide to get fly-fishing boots as well.
After all of these purchases, Amazon's machine learning AI will start to pick up on your spending habits and preferences. It'll use this information to then "recommend" other products you may like based on your behavioral patterns and purchases.
And that's just one form of data mining.
The data mining industry is often referred to as "Big Data." And the industry is anticipated to see exponential growth over the next few years. That's despite growing concerns involving privacy and the misuse of data mining technology.
Here's Why Palantir Is Not a Great Investment Now
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It all comes down to Palantir's financials. And there isn't much information on that front. In fact, the only real indicator of revenue is when the president of Palantir France said the company made $1 billion in 2018 in an interview.
So, while we know it works with the U.S. government, there isn't much transparency. As a result, coming up with a proper valuation prior to the IPO isn't easy.
In 2015, prospective investors said shares were worth $11.38 with a valuation of roughly $20 billion. But more recently, employee stock options indicated shares were worth $6. This would put the company's value at $11 billion - almost half of 2015's estimate.
But even then, there have been reports that employees could buy shares up to $1 less than the already discounted price.
However, Palantir's value isn't all about the numbers. There have been reports of political turmoil within the company over Thiel's conservative beliefs clashing with CEO Alex Karp's very liberal stance. This clash in philosophies has apparently impacted overall company morale.
On top of that, recruiters have even said candidates have declined job offers over political strife and the potential for the software to be misused by the government. And to some degree, worries over misuse and civilian privacy are very valid.
So, the company's valuation is a little challenging to determine. In fact, it really depends on who you ask.
SP Investments Management says shares are worth $7.87, while other mutual funds say they're as low as $2.49.
Peter Thiel says the company is valued at $20 billion. Morgan Stanley (NYSE: MS) says $41 billion. Its seven mutual funds say it could be anywhere from $4.1 billion to $14 billion, while employees say it's somewhere around $11 billion.
But if you're looking to jump in on Palantir without the risk that comes with volatile IPOs, we have a huge investment for retail investors.
In fact, it's the best backdoor play on the Palantir IPO...
This Is the Best Backdoor Play on the Palantir IPO
The backdoor play is IHS Markit Ltd. (NASDAQ: INFO). This company provides Palantir with data and devices to improve the company's operations.
IHS is an intelligence company that works in government, aerospace, automotive, chemical, defense, energy trade, maritime, and financial markets.
It's not a very well-known company, but it's profitable. IHS reported it made $4 billion in 2018. Beyond that, its adjusted EBITDA was $1.6 million.
Through 2019, IHS is estimated to make another $4.45 billion (11% yearly growth). By 2020, forecasts are calling for $4.71 billion (5% yearly growth).
IHS' Q1 2019 showed sales rose 13% from the same quarter the year before.
So, analysts are predicting bullish earnings ahead for the intelligence company. In Q1 2019, shares increased over 6% to $0.65. However, predictions expect a 12% boost in 2019 to $2.55 from 2018's $2.29. By the end of 2020, it'll jump to $2.88. That's another 13% increase in one year - and a 25% increase in two.
IHS shares currently trade for $56.48 each, but they could increase as high as 25% to $70 per share.
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