Wall St has never seen a company like Palantir

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Wall Street has never seen a company like Palantir before.

Both a software publisher and a consultant, with a controversial reliance on the US government and military labor, Palantir only has 125 clients and remains heavily in deficit after 17 years in business.

Last week, it ended plans to list its shares directly on the New York Stock Exchange, entering the market during a booming year for tech stocks.

But it’s unlikely the market will see it as the type of software stock that’s in high demand right now.

For starters, the nature of Palantir’s work was always sure to put her in the spotlight. Its surveillance tools, developed in the aftermath of the 9/11 attacks, were designed to automate the work intelligence officers previously performed by hand.

The very power of technology, based on the integration of many different data sets, has made it possible to sift entire populations in search of terrorists or other disbelievers.

Its work has expanded beyond national security and intelligence to the commercial world – JPMorgan used its software eight years ago to try and spot rogue traders. But one of its priorities, according to a regulatory brief released last week, is to become “the US government’s default operating system.”

After his co-founder, venture capitalist Peter Thiel, spoke out in favor of Donald Trump at the 2016 Republican convention, Palantir also became a lightning rod for a polarized America.

“Everything changed” at that point, said Chris Hoofnagle, a professor at the University of California at Berkeley who sits on the company’s internal board for privacy and civil liberties.

Since then, the outcry over some of his work – particularly in helping US immigration and customs services identify illegal immigrants to be deported – has become “a sort of collateral attack on President Trump,” a- he declared.

Palantir backers have long sought ways to distinguish it from other large US tech companies who are reluctant to take on defense work, as well as traditional US defense contractors, who have no roots in the software industry. of Silicon Valley. “We have chosen our side and we know our partners appreciate our commitment,” wrote Alex Karp, Managing Director, in a letter to investors.

But Mr Karp also admitted that the ethical challenges the company faces are “constant and relentless”. In his brief, Palantir sought to highlight his work with “liberal democracies,” while leaving room for help other American allies who fall short of that description.

Some insiders have been frustrated by the company’s continued public association with Mr Thiel and argue that he has not been involved in its operations for years.

But the serial entrepreneur remains chairman and owns 29.8% of a special class of watch shares – a larger share than any other insider. Through another particular category of shares, he is one of the three co-founders who, between them, are effectively guaranteed long-term control of the company, even if their personal holdings decrease to almost zero. .

Palantir has also been beset by the widely held perception that his work has given him too much control over deeply sensitive personal data, for example when he was given an assignment earlier this year to collect health data in the UK. United in the fight against Covid-19.

The company itself has insisted that it only hosts the data on behalf of its customers, like any other enterprise software company.

According to Hoofnagle, the audit trails and other privacy controls built into Palantir’s technology make it possible to see who has had access to the information in its systems and what it has been used for, putting it ahead of the tools of Palantir. other technology companies.

It is possible, for example, to see how much weight each piece of data collected in a survey had in a final decision, which is not possible with manual surveys.

But even though Palantir doesn’t control the data itself, its technology puts enormous power in the hands of customers, many of whom don’t disclose how they use it. “We need to come to a place where data controllers are required to have procedures and safeguards, and effective enforcement against abuse,” Hoofnagle said.

In addition to its controversies, Palantir must now convince Wall Street of the merits of its economic model.

As recently as 2018, she recorded an after-tax loss equal to all of her income for the year. Much of this reflects the high cost of engineers required to customize its software to work on each mission.

Its plans were also expensive to carry out: for its work with the CIA, the company had long had 10 engineers working full-time at the agency, according to a person close to the company.

Despite being in business for 17 years – far longer than most other large private tech companies – the company has only recently tried to reshape its operations into something more like the traditional software business model. , reducing the time needed to install its technology and replacing engineers with more automation.

The intermittent nature of its big wins also makes it difficult for investors to judge the company.

Revenue jumped 49% in the first half of 2020, double the pace of the previous year. Much of this stemmed from the victory in what Palantir claimed to be a landmark court case, challenging the U.S. military’s preference for building its own software platforms rather than buying something already available in the trade. Since then, sales to the U.S. military have jumped, accounting for 16% of sales in the first half of this year, down from just 1% in 2018.

Palantir also claims that its underlying profitability has grown rapidly over the past 18 months, indicating an internal metric known as “contribution margin”. That metric – gross profits minus selling and marketing costs, but with stock-based compensation expense added – fell from 21% in 2019 to 48% in the first half of this year.

A precipitous decline in selling and marketing costs as a share of revenue explains most of the improvement, which begs the question of how sustainable its higher growth rate will prove. And if equity compensation costs were factored in, even the profit margin Palantir chose would drop to just 10 percent.

Another consequence of Palantir’s high marketing costs and small number of high-value clients has been what people familiar with his business admit is a powerful incentive to retain clients for the long term in order to make relationships profitable.

This has fueled criticism that the company is using initial contracts with new customers to gain a foothold, before using them to grow into a critical supplier at the heart of vital intelligence systems.

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His work on Covid-19 in the UK, for example, was undertaken for free, suggesting it was part of an effort to lay the technological foundation for a longer-term push into the health (a similar Covid-19 mission to the United States was undertaken on commercial terms, due to contractual rules that prohibit agencies from accepting free work).

Palantir has long argued that it gives customers the tools to easily export their data if they no longer want to use its technology. But the nature of its contracts can make it a rare occurrence. “Once it works, you hardly ever replace a monitoring system, historical data is so important,” said Alfred Chuang, a seasoned software executive and investor.

If that turns out to be right, and if Palantir can expand its reach into the bowels of some of the most sensitive government and enterprise data systems, it might finally have a chance to turn a profit.

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