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Palantir's Bankers Reportedly Expect High First-Day Multiples

The trading price expected for Palantir would value it at more than $25 billion after accounting for recent stock and options grants.
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Palantir Technologies' bankers reportedly expect the company to be granted a steep valuation when it starts trading next week.

Much like Spotify in 2018 and Slack Technologies in 2019, Palantir plans to eschew the traditional IPO process, in which new and/or existing shares are sold to select investors via underwriters and begin trading the next day. It will instead pursue a direct listing, in which existing shares immediately float on an exchange.

The data-mining and analytics software provider plans to float its shares on Sep. 30 under the symbol PLTR. And according to The Wall Street Journal, Palantir’s bankers have told it that shares could begin trading at around $10.

Based on a diluted share count of 2.2 billion as of June 30, a $10 price would spell a $22 billion valuation. However, if one also accounts for 341 million shares and “other potentially dilutive securities” (for example, stock options and warrants) granted after June 30, Palantir’s valuation would rise to $25.4 billion. (source: Palantir’s IPO prospectus)

With Palantir having recently guided for 2020 revenue of $1.05 billion to $1.06 billion, the latter valuation would result in Palantir being priced at 24 times the midpoint of its 2020 revenue guidance.

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Such a forward revenue multiple would be close to the ones currently sported by growth-stage software firms such as Atlassian  (TEAM) - Get Atlassian Corp. Plc Class A Report, Twilio  (TWLO) - Get Twilio, Inc. Class A Report, Agora  (API)  and ServiceNow  (NOW) - Get ServiceNow, Inc. Report, and it would be meaningfully above the forward sales multiples of software firms such as Workday  (WDAY) - Get Workday, Inc. Class A Report, Elastic  (ESTC) - Get Elastic NV Report, Smartsheet  (SMAR) - Get Smartsheet, Inc. Class A Report and Splunk  (SPLK) - Get Splunk Inc. Report.

At the same time, such a valuation wouldn’t be quite as high as the ones sported by the most richly-valued, publicly-traded, software firms. Zoom Video Communications  (ZM) - Get Zoom Video Communications, Inc. Class A Report, for example, now carries a forward sales multiple of 59 (admittedly, this multiple could be a little conservative, given the magnitude of Zoom’s recent sales/earnings beats). Datadog  (DDOG) - Get Datadog Inc Class A Report carries a forward sales multiple of 48.

Questions about the sustainability of Palantir’s recent growth rates could temper enthusiasm for its direct listing a bit.

Though Palantir’s revenue rose 49% annually in the first half of 2020 and is forecast by the company to grow 46% to 47% in Q3, its full-year sales guidance implies only 41% to 43% growth. That in turn suggests Palantir, whose growth rates have gotten a recent boost from some major government contracts, expects growth to decelerate meaningfully in Q4.

In addition, Palantir for now is only forecasting its 2021 revenue growth to be “greater than 30%.” And while the company forecasts $116 million to $126 million in non-GAAP operating income for 2020, this guidance excludes $54 million in direct listing expenses as well as stock compensation expenses, which totaled $182 million just in the first half of 2020.

Nonetheless, given how much enthusiasm Wall Street currently has for software firms posting strong top-line growth, Palantir is picking a near-ideal time to go public.