After 17 years on the private
market, data analytics company Palantir is ready to make its
public market debut. Co-founded by Peter Thiel back in
2003, i ts mission: Providing software that customers use to integrate volumes
of data, from images to spreadsheets, into a central platform where
it can then be securely analyzed and interpreted. News of Palantir's plans to go public,
as well as its recent announcement that it will be relocating its headquarters
from Palo Alto to Denver has put the secretive software
company in the spotlight. Best known for its work with U.S. government agencies like the CIA, the
Department of Defense and, most controversially, Immigration and Customs
Enforcement, the company was founded following 9/11 with the
goal of defending American interests. The core mission of our company always
was to make the West, especially America, the strongest in the world, for
the sake of global peace and prosperity. But in recent years, Palantir
has also courted customers like Airbus, Chrysler and BP. Commercial customers now make up about
50 percent of the company's revenue, a number that's trended
upwards over the past decade. And even though Palantir has never
turned a profit, revenue has been growing as losses have narrowed. Perfectly normal for a software company
to show that sort of trajectory going into their IPO. The question is, does the economic model
over time look like one that will eventually produce profits? And you can certainly get there. But while longtime investors are eager for
the company to go public, for others, confusion remains about what it
is exactly that Palantir does and why their work with law
enforcement agencies has raised eyebrows. The name Palantir comes from
the Lord of the Rings. In the fantasy series, Palantiri are
spherical stones that help powerful users see what is going on in
other parts of Middle-earth and communicate with each other. Founded in 2003
by billionaire Peter Thiel, alongside current CEO Alex Karp, Joe Lonsdale,
Stephen Cohen and Nathan Gettings, Palantir's tech helps detect unusual
or suspicious patterns in large datasets, using techniques that the
founders learned working together at PayPal. The CIA was one of the
company's earliest investors and its only customer for a number of years. Eventually, other intelligence agencies like the
FBI and the NSA jumped aboard, using the company's customized
data analytics capabilities to track and capture terrorists,
insurgents and drug smugglers. They cite Afghanistan and Iraq as
two examples of places where soldiers were mapping networks of insurgents and
makers of roadside bombs by hand. So they actually were bringing in
technology to do things that intelligence agents on the ground were
having to do manually in very dangerous places. The company's software has been credited
with helping to find and kill Osama bin Laden. And though this
has never been confirmed, Palantir certainly has not disputed it. The tech's also helped to uncover
Bernie Madoff's Ponzi scheme and rooted out Chinese spyware installed on
the Dalai Lama's computer. We work hand-in-hand with most of
the special operators in the Western world. We work hand-in-hand with
most of the clandestine services. We're in over 40 countries. Today, the company increasingly
works with high-profile commercial customers too. Its first was JPMorgan
Chase, which adopted the software in 2009 to monitor employees
who might go rogue. However, the partnership ended in
scandal when JPMorgan's Special Operations Lead used it to
spy on top executives. Others have continued to
express interest, though. Fiat Chrysler now uses Palantir to
identify potential faults in car parts. Airbus uses it to respond
more quickly to manufacturing problems, accelerating the production of
its 350 aircraft. And BP uses it to analyze drilling
data, reportedly leading to a 10 percent increase in oil production
in the North Sea. This is a hefty piece of software
that runs across an enterprise and is used for understanding everything that a
company faces, whether it's their customers, their supply chains,
downtown, geographies where there's growth, where their competitors
are gaining share. As revenue from the commercial sector
has increased over the years, CEO Alex Karp has had to rethink
his historical dismissal of salespeople. We don't look like a
classic enterprise software company. We have no salespeople. Almost everyone here is an engineer. Not anymore. Karp's been building
out a sales team. And in 2019, the company spent 61
percent of its revenue on sales and marketing. However, long-standing government
contracts remain integral to the company's revenue as
well as its reputation. And during the coronavirus crisis, Palantir
has formed a number of new partnerships too, with the VA, the
National Institutes of Health and Britain's National Health Service, helping these
agencies, as well as the CDC, to track the spread of
the virus and allocate resources. In order to make decisions r ight now,
in order to know where the PPEs need to go, in order to know when and
where you're going to reopen , you want all the analytical models, all the
pieces of information, all in one place. Palantir is really designed
to thrive in a crisis. But especially under the Trump administration,
t he company's work with ICE and police departments has raised
considerable concern in the liberal-leaning Silicon Valley, leading Palantir
to double down on its commitment to law enforcement
and national defense. So I do think this idea of
like nationalism and libertarianism is kind of intersecting in a very interesting way
and Palantir seems to represent all of that. Protests against Palantir
first gained traction in 2018, primarily in response to the
company's contracts with Immigration and Customs Enforcement, which are worth
up to 92 million dollars. The agency has cracked down on
illegal immigration through workplace raids and separating families
at the border. My house has been protested for
many months, almost every day. Our office has been protested. Many Palantirians protested
against it internally. Some people were so upset
about it that they left. These are very hard decisions. Co-founder and board member Peter Thiel
is probably president Trump's most famous Silicon Valley backer, donating 1.25
million dollars to his 2016 campaign. Karp's politics differ, but he
says that Palantir remains fully committed to aiding the U.S. government. I've never stopped being
critical of this administration. I'm not planning to
vote for this administration. So there are things
I would do differently. The core issue though
is, who decides? The small island in Silicon Valley that
would love to decide what you eat, how you eat and monetize all your
data, should not decide who lives in your country and on what conditions. There are elections. There are rules. They should be enforced. Karp's ethos
also holds true for Palantir's work with police departments, from New York
City to Los Angeles, New Orleans and Chicago, who have used the
tech for surveillance of criminal suspects and predictive policing, a tactic that
civil liberties groups say leads to over-policing of
minority neighborhoods. But can Palantir really claim to
be above the political fray? I understand the desire to be neutral and
to kind of say, hey we're gonna play by the rules. That is a logically coherent stance
if companies are also neutral with regard to who makes the laws. But hold on, if you're willing to
back political factions with your own money, you can't say while in this
aspect of our business, we do influence policy and politics. But over
here we are politically neutral. It doesn't work that way. Other tech
companies like Google have backed out of controversial contracts with
the Defense Department. But Palantir sees that as
an abdication of responsibility. Peter and I built
a very patriotic company. Google is clearly not
a patriotic company. Karp also hit back against the culture
of the Valley in the company's S-1 filing to go public. Here's what he had to say: The
engineering elite of Silicon Valley may know more than most about building software, but
they do not know more about how society should be organized
or what justice requires. Our company was founded in Silicon Valley,
but we seem to share fewer and fewer of the technology
sector's values and commitments. In August, the company announced it
will move its headquarters to Denver, Colorado, likely both a
financially and morally-motivated decision. The Valley has basically sold its soul
to an advertising model where it's OK to sell your data, but it's
not OK to support the country. And they didn't want to be part
of that ecosystem and didn't feel that that ecosystem was aligned
with their values. So what does all this
controversy mean for investors? For those who believe in Palantir's
mission, it could be an asset. And for those with qualms, while
it ultimately may not mean much. The general belief around the Valley
is that public market investors in particular talk a big game about
governance and about things that they view as acceptable and unacceptable, and
then they buy the stock anyway. Though Palantir has yet to turn a
profit, t his isn't of considerable concern to investors, who are used
to betting big on tech companies operating at a loss. What will affect the company's value is
whether investors view it more as a high-growth tech company or
a lower-margin consulting firm. That combination makes this a bit of
a Rubik's Cube for investors, because it's not a pure play software model. For most of its history, Palantir
has spent heavily on software customization services for both
government agencies and large corporations. It is a very
costly business to run. But if they can automate their own
processes and have a more efficient sales process and get the biggest customers
to continue to buy more, then their operating metrics do
improve over time. As of late, that's what Palantir
has been trying to do. And now it offers two fixed-fee
platforms, Gotham for government clients and Foundry for the private sector. The company's target market is said to
be the 6,000 companies that make 500 million dollars or
more in revenue. So the average customer spends over
five million dollars a year on Palantir's product. The top 20 customers account for
roughly two thirds of their revenue. They say they only
have about 125 customers. So this is fundamentally different than
your Zoom and your Slack. It is not for everyone. In 2015, when Palantir raised its
last funding round, the company's valuation was upwards of
20 billion dollars. But lately, share prices have been
all over the map, indicating a valuation range of anywhere from less than
10 billion to over 20 billion. They're trying to show investors that they
do have this really big market opportunity, that they have a bunch
of potential customers out there. And that's where the skepticism is. The true value will be clarified at
the end of September when Palantir completes its direct listing, a process that
is similar to an IPO, except that the company won't
sell any new shares. It will just unleash those
held by existing investors. Thus, the shares will be priced based
on investor demand and if the stock trades higher than expected, that value
won't be handed to brand new shareholders. I think the Palantir IPO
is going to signal to venture investors and others that serving the
Department of Defense and military business is going to be worthwhile. Karp certainly hope so, saying that the
future of our nation depends on it. The country with the most important
AI, most powerful AI, will determine the rules. That country should be
either us or a Western country. Palantir doesn't do business with China,
the U.S.'s main competitor when it comes to AI. So if we bring
our A game, we will win. If we bring our D plus game because
most people in the Valley live on an island where this seems like a
questionable project, they will win.
