What you need to know about Palantir's direct listing

What does Palantir do?

Back when it was founded in 2003, Palantir's focus was on building products for U.S. defense and intelligence agencies. The company says its software platform, Gotham, "enables users to identify patterns hidden deep within datasets." In other words, it's a data dashboard. Along with the software, Palantir offers ongoing services to help customers use it, which has reportedly included building custom software for clients.

But Palantir's scope has expanded to much more than defense. The company's Foundry product does something similar to Gotham, but is targeted at the private sector, helping "organizations interact with information by creating a central operating system for their data."

In total, Palantir has 125 customers — a list that includes some big names. The U.S. government is a major customer, with a range of agencies (including, controversially, ICE) using the platform. BP, Ferrari and Airbus are among the company's private-sector clients.

Palantir's Financials

Let's get the big thing out the way first: Palantir has never made a profit. Though the company had $743 million in revenue last year, large costs led to a net loss of $580 million. Much of that does, admittedly, come from stock-based compensation, though even excluding that, the company lost $338 million last year.

Things are improving somewhat, however. In the first half of this year, Palantir brought in $481 million, a 49% year-on-year increase, and reduced its net loss from $280 million in the first half of 2019 to $165 million this year. Excluding stock-based compensation, the company made a modest $17 million profit in the first half of the year — though it's questionable whether excluding $182 million of expenses is useful.

The primary reason for the losses is the company's heavy sales and marketing spend, which accounted for 61% of revenue last year. In its filing, Palantir outlines its lengthy and expensive sales cycle, noting that "in many cases we launch, at our expense, pilot deployments with customers without a long-term contract in place." It also explains that the company relies on senior management to secure sales — hence CEO Alex Karp's $600,000 annual travel stipend, which doesn't even include almost $1 million in plane-chartering costs.

Still, there's the potential for big rewards ahead. The company says the total remaining deal value of its government contracts is $1.2 billion, which doesn't include $2.6 billion worth of "indefinite delivery, indefinite quantity contracts." But neither of those are guaranteed.

What Could Go Wrong?

Palantir's lengthy risk factors section has a few eyebrow-raising moments. For investors, the most concerning might be its high customer concentration. Palantir said its top 20 customers accounted for 67% of its 2019 revenue, while its top three customers made up 28%. In fact, a single commercial customer accounted for 12% of its 2019 revenue. Losing any one of those major customers could have a big financial impact on Palantir's business.

Part of that limitation is of Palantir's own making. The company says it won't work with "customers or governments whose positions or actions we consider inconsistent with our mission to support Western liberal democracy and its strategic allies." In particular, the filing notes that "working with the Chinese communist party is inconsistent with our culture and mission." In short, the company writes, "we have chosen sides." That could work to Palantir's benefit — the U.S. government might be more inclined to work with it than with a competitor that has Chinese dealings — but it also limits the potential revenue opportunity.

Some other risks the company highlights:

• Palantir thinks the Privacy Shield strike down, CCPA and GDPR could lead it to "incur substantial costs … in an effort to maintain compliance."
• It's also worried about its reputation, saying it could be harmed by "coverage that presents, or relies on, inaccurate, misleading, incomplete, or otherwise damaging information." It notes that some of its clients "are perceived to be harmful," which has led to activism against the company that could turn off potential new customers, investors and employees.
• That's a lose-lose situation, the company says: "Being perceived as yielding to activism targeted at certain customers could damage our relationships with certain customers … whose views may or may not be aligned with those of political and social activists."

And then there are the mechanics of the listing. Palantir is pursuing a direct listing rather than a traditional IPO and warns investors that the lack of underwriters could lead to "greater volatility in the public price of our [stock] … immediately following the listing."

Who Gets Rich

The listing has the potential to be a bonanza for Peter Thiel, the company's founder and largest shareholder. Thiel owns just over 20% of the company: If the company achieves the $26 billion valuation it was reportedly targeting last September, that could be worth over $5 billion. Thiel also has an indirect stake via his venture capital firm Founders Fund, which owns around 8% of the company.

That $26 billion valuation is uncertain, though. The filing says that private market transactions took place at an average share price of $6.30 in August, which values the company at just over $10 billion. But that number's trending up: The average private market share price was $5.42 last year. Still, take all those numbers with a pinch of salt: As the company notes, they may not reflect its public price at all.

If the company is valued at $26 billion, other potential winners include:

• CEO Alex Karp, whose 6.7% stake could be worth $1.7 billion.
• President Stephen Cohen, whose 2.2% stake could be worth almost $570 million.

Thiel, Karp and Cohen are all set to win in another way, too, thanks to the company's unusual voting structure. Along with single-vote Class A shares and 10-vote Class B shares, the company is authorizing Class F shares, which have variable voting rights. Thiel, Karp and Cohen each own a third of those F shares, in a structure designed to give them 49.999999% of Palantir's votes. Added onto their significant Class B stakes, the three should maintain control of the company (as long as they meet an ownership threshold.)

What People Are Saying

On the competition: "There has been an assumption that Palantir is the only major player in this space … but it is clear that is not the case." — Jack Poulson, Tech Inquiry.

On Alex Karp's mission statement: "Michel Foucault meets the seven habits of highly effective people." — Mike Isaac, The New York Times

On Alex Karp's criticism of data-collecting companies: "Few things are as indicative of how upside-down morality is in tech like companies who enable ICE to separate families bragging they're unlike companies 'built on advertising dollars.'" — Dare Obasanjo, Microsoft

On China: "Palantir is very much betting on the ultimate primacy of distinct cultures and defined nation-states; it's a bet that seems increasingly well-placed." — Ben Thompson, Stratechery