Venture Bytes #66 – Palantir Technologies – Well Primed for its Public Market Debut

Palantir Technologies – Well Primed for its Public Market Debut

After operating for 17 years in the private market, Palantir Technologies is ready to make its debut in the public market. The company is scheduled to list its shares on the NYSE on Wednesday, September 30.

Is the company ready to meet the demands of public market investors? That is a pivotal question for all new listings. It is all the more so in the case of Palantir given its long incubation period in the private market, the highly intrusive nature of its software, and its contract with the US Immigration and Customs Enforcement (ICE), which has been highly controversial and unpopular.

All the noise around the company notwithstanding, the company is well positioned for the public market. A strong product portfolio, particularly the Foundry product for the enterprise segment, its large total addressable market (TAM), its promising pipeline of government and commercial contracts, and most important, its healthy financials with a clear sight to profitability, are all underlying drivers.

Palantir’s leading business intelligence tools backed by a strong patent portfolio have enabled a high customer retention rate. Enhanced product features across the enterprise have entrenched the company with clients and raised the switching cost. Accordingly, its average revenue from customers (ARPC) has grown at a CAGR of 30% since 2009. While ARPC from all customers was $5.6 million in 2019, Palantir generated $24.8 million per its top 20 customers and realized an increase of 36% in the first half of 2020. Amid the COVID-19 crises, Palantir has leveraged its deep data mining capabilities and strong reputation to win contracts from the CDC in the United States and the NHS in the U.K.

Palantir’s rollout of the Foundry product for the enterprise segment has been well received. Foundry is essentially plug-and-play software, requiring relatively little hands-on installation and maintenance time at the customer site. Specifically, Palantir has shifted from costly customization to five-fold faster installation and deployment since Q2 2019, coupled with significantly less handholding. This has helped reduce G&A expenditures and pushed margins higher. Palantir’s contribution margin jumped to 48% Y/Y in H1 2020 from 17% in H1 2019 and surged to 55% in the June ending quarter.

Essentially, Palantir’s technology platforms function like an operating system, which create logic from a set of software applications stored in hardware devices. The company’s technology platforms create logic from a set of purposely as well as randomly generated data. These platforms are open technologies that make various customizations possible depending on user requirements.

Palantir’s TAM is $120 billion and the company is well positioned to capitalize on its position as a market leader for predictive analytics. The company’s innovative software suite is highly scalable and applicable across multiple verticals. Leveraging its strong grounding in the defense and intelligence agencies, the company has expanded into other verticals such as healthcare and biosciences. According to the company, the TAM in the government sector is $63 billion and $56 billion in the enterprise segment comprising 6,000 companies with over $500 million in annual revenues.

The company’s financial profile is strong and improving. For the full year 2020, the company currently expects revenue of $1,050 million to $1,060 million, representing year-over-year growth of 41% to 43%, and non-GAAP operating income of $116 million to $126 million, excluding stock-based compensation, related payroll tax expenses and approximately $54 million of one-time expenses related to the direct listing incurred in the third quarter of 2020. For the full year 2021, the company currently expects year-over-year revenue growth to exceed 30%. Palantir exited the second quarter of 2020 with $1.5 billion in cash and cash equivalents and $298K of long-term debt. Cash flow from operations, though still negative, improved by 50% in 1H 2020.

Against this backdrop it is reasonable to expect a positive reception for its direct listing on September 30, and a good outlook for its prospects as a public company.

Rumors of the Death of IPOs Were Greatly Exaggerated!

The IPO market is having a banner year. U.S.-listed initial public offerings for the three quarters to date have raised nearly $95 billion through September 23, according to data provider Dealogic. Except for 2014 (when IPOs raised $96 billion), that surpasses the totals of every year since the tech bubble peaked in 2000. At this rate, 2020 IPO totals will even eclipse 2014, and may ultimately surpass the “irrationally exuberant”, tech-boom years of 1999 and 2000.

All the frenzied buying of new issues this year has resulted in the 22% first day gains, the largest since 2000. On average, 2020 IPOs have risen roughly 24% from their offering prices.

This year, more than 80% of the money raised in initial public offerings went into three baskets: healthcare, technology, and SPACs, also called blank-check companies. According to Dealogic, that is the most concentrated IPO market since 2007, when new listings of banks and lending institutions flooded the market before the financial crisis.

More than 235 companies have joined U.S. public markets this year, on track for the most since 439 companies went public in 2000, according to Dealogic. The list excludes major unicorns in the wings such as Airbnb, which is expected to file later this year, Palantir, and Asana, both of which are scheduled to list this week.

What exactly is driving this hectic IPO activity?

While there are several factors, we believe three of them stand out: Softbank’s pull-back from funding private companies generously through its Vision Fund, the recognition of software companies’ importance during the ongoing pandemic and their expected core position in the enterprise IT infrastructures of the future and, lastly, the rush to beat the clock ahead of the expected volatility and uncertainty in a presidential election year.

Following the string of successful IPOs to date, is it reasonable to expect the momentum to continue? Will venture startups return to the historical timeline of 5 to 6 years to IPO instead of the current average of 10 years, and more in some cases?

These are important questions and the answers rest on two factors: Will there be another Softbank-like company with the patience and the capability to fund private companies? And will the IPO process become more efficient and fairer following the popularity of SPACs and Direct Listings? If the answer to the first factor in “no” and to the second a “yes”, expect the strong flow of IPOs to continue for some time.