Palantir is being valued around $10.5 billion ahead of direct listing as investors question growth story

As Palantir gears up for its stock market debut, the company has a long way to go to convince potential shareholders that it’s worth the $20 billion price tag that investors gave it almost five years ago.

Palantir held a virtual event for investors on Wednesday. The company, whose software helps government agencies and large corporations make sense of vast amounts of data, also released an updated prospectus, indicating that the number of shares outstanding increased in the third quarter, to 1.64 billion from 1.53 billion in the prior period.

Based on an average share price transaction in the latest quarter of $6.45, investors are valuing the company at just over $10.5 billion.

But the numbers are all over the map.

In July, Palantir raised $410.5 million by selling shares at $4.75 a piece, according to the filing, which comes out to a valuation of about $7.8 billion. Transactions during the quarter took place at anywhere from $4.17 a share to $11.50 a share, suggesting a range of $6.83 billion to $18.8 billion.

The math gets even fuzzier when considering that Palantir had a reported valuation of $20.4 billion in 2015, when the share price was $11.38. That price, based on the supplied share count as of Sept. 1, would indicate a current valuation of $18.6 billion.

A Palantir spokesperson declined to comment on the numbers.

What’s clear is that most investors see a company that’s worth closer to $10 billion than $20 billion. If Palantir’s direct listing values it at around the average private market price, the stock will trade at about 10 times revenue, a healthy ratio but less than one-fourth the price-to-sales multiple for companies like Zoom, Datadog, Shopify and Zscaler. 

The challenge for Palantir is to convince investors that it’s more of a high-growth tech company than a low-margin consulting services firm. In recent years, private investors turned bearish on the company, with many large funds marking down the price internally as growth lagged and costs soared.  

Palantir’s executives focused much of their attention in Wednesday’s presentation on changing the narrative. From its first product launch in 2008 until the last couple years, Palantir had spent heavily on customizing its software for clients, whether large government agencies or big corporations. That approach dates back to Palantir’s early days, when the bulk of its work was with intelligence agencies.

CFO David Glazer said the business operates differently today. Palantir now sells its two platforms, Gotham for government clients and Foundry for the private sector, charging fixed fees with maintenance costs. Airbus and BP are among its largest commercial clients.

“We’re exclusively deploying these two software platforms across all our customers,” Glazer said. 

Palantir wants investors to concentrate on what the company calls its contribution margin, or the revenue left after subtracting the costs it bears to generate sales. That number climbed to 55% in the second quarter from 18% a year earlier. 

Palantir says the rapid margin improvement has come from its ability to deploy the technology faster, requiring less physical work and hand-holding, and by getting existing customers to increase their spending over time. 

“We’re getting much more efficient,” said Kevin Kawasaki, Palantir’s head of business development.

In the first half of 2020, Palantir’s total revenue jumped 49% to $481.2 million, with just over half its sales coming from government customers. Costs for sales and marketing and research and development dropped, allowing Palantir to narrow its net loss to $164.7 million from $280.5 million.

But Palantir remains a very expensive product that hardly anyone uses — the opposite of Zoom or Slack. It’s not an easy-to-use application that employees try out with a small team and then convince their colleagues to adopt. Rather, Palantir describes its technology as the “central operating system” that companies use for their data. 

Palantir has only 125 customers that spent on average $5.6 million each in 2019.

Glazer says the company’s products and sales strategies are “in their infancies.” In its prospectus, Palantir identifies its addressable market as the 6,000 companies with over $500 million in revenue.

But there’s a monstrous gap between 125 and 6,000, and not everyone is sold on Palantir’s story.

Brendan Burke, senior emerging tech analyst at PitchBook, said in an email that Palantir’s “low customer logo count” suggests that “Foundry is not scaling across large enterprises.” He also notes that while the overall business grew almost 50% in the first half of the year, the commercial segment only expanded by 27%, raising concern that the recent level of revenue growth “may not continue to accelerate going forward.”

Employees have a lot at stake in the coming months. As recently as August, Palantir granted 162 million stock options to certain officers at $11.38 a share, the prospectus says. That’s much higher than what investors have been paying of late, and exactly what they were willing to shell out in 2015. 

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