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Palantir Technologies Inc. (NYSE: PLTR) stock is expected to hit the market this week. Analysts are predicting a $22 billion valuation.
The company has decided to go with a direct listing to avoid much of the prolonged scrutiny that comes with a regular IPO.
This raises questions for many investors. But this is also one of the most exciting IPOs of the year for good reason.
Palantir stock joins the ranks of companies like Snowflake Inc. (NASDAQ: SNOW), JFrog Ltd. (NASDAQ: FROG), and Asana (NYSE: ASAN) that have filled the tail end of the year with some exciting tech IPO prospects.
Today, we're going to talk about whether Palantir stock is a buy or not. You might be surprised what you find…
What Is Palantir?
You've maybe heard of how data is the currency of our time. It's incredibly valuable to private companies and government agencies alike.
Data on Facebook Inc. (NASDAQ: FB) users can go for up to $100 a person. There are 2.7 billion monthly active Facebook users. If that were constant, it would be at $270 billion market on its own.
Now, take into account how many different data sources there are. How many "inputs" – e.g. smart watches, laptops, smart phones, smart cars, smart TV, etc. – are feeding data centers. This is a mammoth industry, without question.
Silicon Valley's Palantir knows that. It's a "Big Data" company, specifically collecting mountains of data, then selling it to government agents and marketing firms that need it.
Making data useful in this way is called "data mining." Palantir's data mining software serves as many as 12 government agencies – it's rumored to have been used in finding Osama Bin Laden.
According to TechCrunch, the company's clients include West Point, the Air Force, the Marines, SOCOM, the CIA, FBI, NSA, DHS, and the CDC. Palantir has one of the largest U.S. Department of Defense contracts, at $222 million.
In all, Palantir has 125 customers in 36 industries, in more than 150 countries, and its customers are increasing.
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Due to the nature of its work, Palantir has become one of the more secretive companies out there. It's probably even the reason the company has opted for a direct public offering instead of an ordinary initial public offering.
With a direct listing, no underwriters are involved, and no new shares are created. The process goes faster, with less private information revealed about the company.
That said, Palantir's product might be a widespread moneymaker. But the company's secretiveness and corporate governance have come into question just days ahead of the listing…
Is Palantir Dangerous?
CNBC's Jim Cramer recently said on his show "Mad Money" that Palantir's governance is the "most egregious" since WeWork.
If you remember WeWork, the company's valuation was cut from $47 billion to $10 billion and its IPO delayed indefinitely back in October 2019.
WeWork's leadership was called into question, which led CEO Adam Neuman to step down.
There appears to be a similar shakiness associated with Palantir's internal morale.
Employees have been reported to leave the company due to ethical concerns about Palantir's technology. CEO Alex Karp and Founder Peter Thiel have also argued over the direction of the company, much due to their political differences.
The company doesn't just serve the government, either. Its data mining services have been used in the marketing field, taking from around the web to provide better-targeted products and services to customers. It also works in healthcare and aerospace.
For this reason, Palantir's financials may be able to step over the hurdle of its private feuds…
Palantir's Financial Prospects
Palantir was initially going to come in at $20 billion, but the valuation has raised to $22 billion days ahead of the listing.
This could look promising to many investors, but it's also a matter of perspective. Though far more established than many of the tech IPOs we've covered, Palantir is still very much in a growth phase common for young tech companies.
It has yet to profit, with an annual loss of $580 million in 2019. It was able to chip away at that loss in the first half of 2020 with a $164 million deficit. We are yet to see what the total loss is for 2020.
Also for the first half of 2020, Palantir posted a negative cash flow of $226 million. It's promising that this number is up from $340 million year over year, but that doesn't get us out of the woods.
The company needs to continue raising capital if it's going to succeed in the public markets for the near term. Going the direct listing route doesn't serve that cause.
It does, however, have solid institutional backing. It's brought in the at least $1 billion it wanted before going public, from partners like Fujitsu and Sompo Holdings.
This company is at the cutting edge of the emerging data world.
When to Buy Palantir Stock
Shares of Palantir are going for $10 each. There will be 2.2 million shares in total, for a $22 billion valuation.
All but 20% of its shares are locked up until 2021, so we could see a higher volume of Palantir trades by then.
Palantir stock was initially going to trade for $6 a share. It had previously announced a valuation of $11 in 2015. Now that the company is back up at $10 per share, it makes less of a case for an immediate buy after the IPO.
One difficulty faced by this company going forward is still transparency. CEO Alex Karp has mentioned fearing the company could be "less competitive" if it's publicly traded. This could be no truer than for a data company juggling the value and security of data with an obligation to be transparent with shareholders and the SEC.
The best advice for when Palantir goes public could be to see if the price goes down from its $10 mark. There is typically a lot of hype ahead of IPOs, followed by a crash. If you can catch it while it's down, it could deliver slow growth in the years to come.
That's provided the company avoids any serious governance blunders. Investors who want to avoid that mystery altogether can look at stocks already trading publicly, more certain of future growth…
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About the Author
Mike Stenger, Associate Editor for Money Morning at Money Map Press, graduated from the Perdue School of Business at Salisbury University. He has combined his degree in Economics with an interest in emerging technologies by finding where tech and finance overlap. Today, he studies the cybersecurity sector, AI, streaming, and the Cloud.