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The 'Google of CounterTerrorism' Spills Secrets

Palantir filed an S1 statement ahead of its looming IPO and scared some observers with its small list of customers and large history of losses. But fear not: It's headed for stardom.

Late last week, Palantir filed financial statements ahead of its plan to go public. Pundits are talking about the eye-popping losses. Don’t worry about the red ink, investors should get ready to buy shares when they hit the public markets.

The News: A S-1 statement filed with the Securities and Exchange Commission makes it official: Palantir, a super-secretive data integration company, is headed for an IPO, despite making big losses.

The San Francisco, Calif.-based company builds digital operating systems for government agencies and enterprises to find otherwise invisible patterns in mountains of data. Its special sauce is using artificial intelligence and data analytics so that users don’t need any special training.

It’s like Google for counter-terrorism, or enterprise workflows. At least that is the promise.

Critics Say: The company is logging big losses, about $580 million during both 2019 and 2018. Also, Palantir has only amassed 125 total customers despite being founded 17 years ago.

Then there is political blowback. Palantir managers have been unapologetic about taking contracts from controversial government agencies, like the US Immigration and Customs Enforcement.

Yeah, but: Palantir has a huge lead building cool software that happens to be the most cost efficient way for government agencies to deploy results oriented analytics. Palantir software is like the system fictional Jack Ryan uses to immediately cross-reference security camera footage with motor vehicle records and credit card purchases. It’s not quite that in reality, but that is the story Palantir bulls will tell once the shares become public.

The company also has a big competitive advantage: It has an inside track to the biggest government clients. At the onset, Palantir was partially funded by the CIA.

As for the large losses, keep in mind that all of the red ink is related to SG&A (sales and general administrative expenses). These are mostly discretionary costs that can be eliminated quite quickly in the post public world.

Finally, sales at Palantir are booming. Revenues shot up 24.7% in 2019, to $742 million. The company had $481 million in sales during the first 6 months of 2020, up 41%, year-over-year.

Details: Palantir plans a direct listing, forgoing the usual listing process with underwriters. The company is not raising any new capital. It has about $1.5 billion in cash on its balance sheet.

The Bottom Line: Investors should ignore the critics and focus on the narrative. Palantir is building best-in-class, cutting edge software that that intermingles AI and data analytics for counter intelligence, a marketplace that is going quickly. The company could have $1 billion in sales by 2021. 

Buy the stock post IPO for any portfolio that needs exposure to cutting-edge digital transformation leaders.