Horizontal SaaS: Palantir - Understanding Demo Day And AI Ambitions
The purpose of this article is to provide information to Investors about Palantir's Double-click Demo series that will run throughout 2021. If you’ve watched the demo or have not watched it, some of the content will better enable you understand one of the Palantir’s important product. They will showcase how Foundry is being used by their customers across the Life Sciences and Industrial sectors. This event may or may-not be catalyst for Palantir's stock in the short-term, but I believe it will have an effect on the long-term business performance for both Palantir and IBM. If you come across this article after the event, this article should provide some context for better understanding the demo.
My bullish thesis for Palantir is based upon their financial growth and technological capabilities. My financial valuation thesis suggests a price target of $45-$50 based on upon Palantir generating over $1.7B in Revenues in 2021 due to the significant boost the company has received from the signing of new contracts since Q4 2020.
My technology thesis for Palantir is built upon Palantir's Foundry future growth potential and the capabilities of Foundry to penetrate more Fortune 500 Companies over the next decade. I expect the commercial business to become the main revenue driver by 2025 based upon their synergetic partnership with IBM. This makes me equally bullish on IBM's AI ambitions. Both companies could become a leading force in the AI Race.
The article goes into depth because I want Investors to connect the dots between Palantir's new contracts and partnerships over the last six months. You'll observe that majority of them have been centered around industrial-related, automotive and life-science based companies. IBM is considered a major leader within the industrial technological revolution powered by AI. It appears building their capacity within these three industry sectors is one of the company's strategic objective.
The outline of this article is structured in the following; I begin with a Palantir Foundry Refresher of my past article. I explain the goal of the Double-Click Demo Event Series. I explain the Industrial Demo Expectations and expand upon the rise of the Industrial Internet of Things and how Palantir is redefining the next generation of industrial manufacturing with some recent partnership examples. I provide an extensive explanation of IBM's Cloud capabilities and explain how Palantir’s Foundry partnership with IBM creates a powerful synergy that will accelerate growth for both companies. I'll then explain the Life-Science demo expectations. I wrap up with a valuation rationale and Bottom-line conclusions.
Palantir Foundry Refresher:
I made a case in my Feb 21, Palantir: Forget Gotham City, Foundry Has The Untapped Potential on why investors of Palantir should reduce their focus on Palantir’s Gotham business which is primarily Government and pay more attention to Foundry, Palantir's Commercial Application because this business appears to be the future growth driver for expanding their Total Addressable Market Opportunity. Since that article, Palantir has announced a few new partnerships amongst commercial organizations.
In that article, I discussed how Palantir's Foundry is built around four key premises and strengths. The foundations are; i) The Data Integration prowess of Palantir's Foundry for integrating and analyzing massive disparate datasets. ii) Knowledge management, Ontology-based models & Classification of large amounts of data. iii) Search, Analysis & Discovery capabilities and, iv) Enabling collaboration both within an enterprise and externally amongst industries with a clean low-code, no-code interface for business users.
Palantir's software is built on an architecture of complex pieces of software on the back-end, which enables the front-end look simple with their "low-code, no-code" user interface for both technical and non-technical individuals. The software can manage complex situations such as battlefield scenarios for the US Army or for the National Security Agencies for high-profile investigations where situations are constantly changing. The ability to apply this data expertise from an unstable environment towards an enterprise/customer behaviour where things are slightly more controlled, than a battlefield shows the immense future capabilities Foundry could impact upon organizations especially when combined with the new features that IBM will bring to the table (More on this later). Based off my experience working on a Data Science team, Palantir is solving a key problem for many organizations.
What is Double-Click?
Source: Palantir Double Click/Investor Relations
Double-click is a series of software demo events where Palantir will show how their platforms are being used across a variety of industries. Customers will learn how their applications [Gotham, Foundry, Apollo] are helping existing customers accelerate their Digital Transformation journey. The event should showcase how customers can embed prototypes or archetypes of their existing systems into Foundry to deploy end-to-end business use cases in an easy and less-time consuming format instead of the extensive deployment time that has become the norm for most organizations today. I also Palantir is striving towards increasing transparency with investors (including potential business customers.)
In my previous analysis, I discussed about how Foundry's Artificial Intelligence platform is being used across multiple industries in Oil and gas, power generation, Healthcare, Aerospace, Automotive, Construction, Chemicals management, Clean Energy generation, Mining, Telecommunication, Manufacturing, Distribution, Finance, Consulting, After-Sales, Supply-Chain and many more.
However, this first demo Palantir will focus primarily on the Industrial and Life-Sciences verticals while other sectors will be showcased later in the year. Let's begin:
1) Industrial Sector Demo Expectations
Source: Palantir's Double Click
To understand the Industrial use-cases for Foundry, It is first important to have a foundational understanding of the next digital transformation that is happening across the Industrial sector. When we discuss industrial, we are looking at sectors that are capital and asset intensive such as Oil & Gas Energy company, Airplane & Aerospace manufacturers, manufacturing companies etc.
The next decade will see the unleashing of the next industrial revolution 4.0 (also called the fourth industrial revolution) of intelligent machines, robots and where capital intensive industries will become the new digital businesses. This Industrial revolution 4.0 will be powered by the Industrial Internet of Things (also called IIoT). Industrial IoT is defined as a set of integrated software capabilities that enhance operational visibility, control and augments the connection between machine-to-machines and devices-to-human for companies within the Industrial context.
Industrial IoT utilizes multiple number of external sensors, detectors and monitoring devices that are then connected with a manufacturing software application which allow for instant communication, enhanced real-time data collection and analysis, and further enabling efficiency and automation in the industrial context. As seen below, IoT will power smart factories, smart cities with better transportation, heavy machines, factories etc.
Similar to the Consumer IoT devices that we have in our homes for our Fitbit, home monitoring items such as tracking home lightings, alarm detectors that work with an Amazon Alexa or Google's Nest, we can apply the same technology to an industrial context to interconnect applications that improve the entire industrial process for asset-intensive companies.
Below is an example of how Industrial IoT can be applied in manufacturing. To enable thousands of sensors and IoT devices become intelligent so as to drive automation and the future of manufacturing, they need to be powered and enabled by advanced data analytics, machine learning models, big data, cloud compute, edge computing, 5G networks and cybersecurity. This is where Palantir and eventually IBM's Watson play a role by providing the technology stack to enable IIoT for companies. IBM is considered a leader and I will discuss more on this later. Additionally, Palantir Foundry has the analytical capabilities that enables more proactive, data-driven root cause analysis and problem identification before issues occur to avoid system failures and unplanned downtime. This is based off the way Foundry collects and analyzes data from thousands of devices and sensors around a plant or operational environment "within a few clicks" as Palantir would infer. An example of a digital factory is shown below (zoom in closer):
Source: Internet of Things in manufacturing – the Microsoft view
Digital Twins will lead to better predictability and forecasting:
Digital Twin is central to Foundry. This was an important concept discussed at the last demo and mentioned multiple times. A digital twin is a digital and virtual replication of a company’s physical assets, processes and systems. Within an industrial context, it allows for companies to conduct experimentation without shutting down a system or a plant. Digital twins deliver significant amount of business value by allowing companies to better predict the future and better detect issues before they arise. Palantir's technology has helped many industrial organizations create the Digital Twin and model simulations powered by their Foundry ontology models. The business ontology (think of a company's dictionary or library) provide key data inputs into Palantir's machine learning models which help mirror an organization’s real-world operations. As seen below, here is a digital replica of a manufacturing plant. On a computer software, a business user on the right can see all that information, conduct analysis and perform real-time simulations of the factory through Palantir’s Foundry.
Source: Palantir's Inaugural Live Demo Day
Some Industrial Results So Far:
Some of the results has been exhibited in their most recent partnership announcements over the last 7 months.
The recent BP Energy Partnership is an evidence of the positive results - Palantir has already delivered due to the enhancements in BP's hydrocarbon-based workflows. Palantir says "We continue to support BP’s efforts in risk monitoring, including workflows around infrastructure management, and information flow management." Palantir also supported the BP Digital Twin which has yielded concrete results in providing a more efficient operations management, better modelling of scenarios, asset allocation and has saved BP Energy over $50-million in cost-savings.
Another evidence is the success of their Rio Tinto Partnership regarding connecting people with data at Rio Tinto’s underground operations for mining metals and copper. Foundry's software integrates data from a multitude of disparate on-field sources through hundreds of sensors, machines and human data and then on Foundry, users can create sophisticated analysis to better improve mining operations.
IBM's Watson and Palantir's Foundry Synergies:
I will explain how IBM's Watson and Foundry work together to create synergies that are being utilized to solve those key problems across the Life Sciences and industrial sectors.
First, IBM's key competitive advantage and strengths are built on their underlying data architecture and being the world's most robust hybrid-cloud platform provider especially with the acquisition of Red-Hat. They are also great with infrastructure modernization and network hosting service management. Second, Palantir's key strength is their data integration prowess, their ability to bring AI into operational software applications, and transforming raw data into actionable insights through a low-code, no-code clean interface for non-technical business users.
For this partnership, IBM will use their Cloud-Pak for Data to connect to multiple legacy systems together and handle all the messy data in organization underneath within databases. The illustration below shows how IBM's Cloud Pak provides the underlying Foundation at the bottom and Palantir's Application takes over at the upper funnel by transforming those raw datasets into AI insights for all the business Users and stakeholders across an organization.
Source: IBM Cloud Pak for Data
This partnership will be utilized across many industries, but let us apply it back to our Industrial transformation use-case. It is important to note that in order to build a coherent Industrial IoT Strategy, you need strong cloud computing, data management architecture, security and integration capabilities to capture thousands of data points as mentioned earlier above. This is where both companies synergies come together and IBM plays a big role. According to Gartner Industrial Internet Report, IBM's Watson IIoT platform helps assist industrial companies through the delivery of their hybrid-cloud services on the IBM Cloud (everything above). There is a high amount of Cloud Computing required to make Industrial IoT successful. IBM serves this need and IBM is really good with asset monitoring for manufacturing and transportation services. IBM's Watson also has a wide and deep set of AI functionalities to build Industrial IoT-enabled business solutions. IBM has been investing significantly into hybrid cloud and AI over the last few years especially with their new CEO.
Palantir complements IBM's Cloud data by helping with the scaling of AI models into operational aspects of a business by creating a clean and easy analytics UI interface for business decision-makers. Below is Gartner's Research Magic Quadrant for Industrial IoT Platforms where they perform in-depth market evaluation. You'll note that IBM ranks as only a Niche Player. This is because they lack a full solution and don't have any on-premise operational platforms (like a low-code, no-code UI solution of Palantir) for customers as compared to Hitachi or Microsoft. IBM has lacked an integrated visionary product stack like Microsoft where they have Tableau and Azure. IBM only provides a managed collection of cloud services on their IBM Cloud. They are simply great at providing anything cloud.
This transformation thesis for both companies will playout over multiple years and there are bound to be challenges. On a high-level, some of the key risks of this IIoT thesis is that many organizations face challenges around the significant upfront costs of investing into building these full AI stacks, then there are challenges around cybersecurity, lack of standardization, data integration and data integrity issues. However, I believe this is why key alliances and partnerships are being forged to drive down the cost-curve for more organizations.
Foundry will redefine the future of Industrials
We can gradually see that IBM Cloud Pak Data Services and Palantir's Foundry partnership goes beyond just leveraging the salesforce at IBM, but it does bring together a combined technology expertise to create significant synergies to help businesses scale AI. The positions both companies to lead the AI Race in the future.
The bottom-line here is that Foundry is becoming a central operating system not only for the individual corporate enterprise but also for global industrial organizations. The old way of manufacturing and production involved significant human labour to monitor plants and manufacturing processes that led to significant waste and inefficiencies. The future of manufacturing will be digitized. Palantir is powering all these intelligent sensors that automate and optimize the entire manufacturing process. Similarly to how Google and Amazon were key pioneers in the Consumer IoT markets that made our homes much more efficient. Palantir and IBM are leading the transformation of smart and intelligent industrial factories of the future.
2) Life Sciences Demo Expectations:
Source: Palantir's Double Click
Palantir will demonstrate how Foundry is being used by customers that are Healthcare providers, biopharmaceuticals, hospitals, clinical research and medical research institutions. Palantir will show how Foundry is enabling the creation of the comprehensive patient picture by bringing together and analyzing vast amounts of clinical, observational, and molecular data to better predict health outcomes. The company may showcase how their ontology-based models can handle these situations. It is important to note that over a thousand researchers at the National Institute of Health (NIH) and NHS England National are currently using Foundry to manage Covid-19 initiatives from vaccine supply-management to managing Covid health records of citizens. We may also learn about their partnerships with the National Center for Advancing Translational Sciences (NCATS) and Syntropy-EMD Digital Partnerships (a subsidiary of Merck) where they are advancing cancer research. In both of these two scientific partnerships, Foundry's software is enabling several critical health projects through the integration, management, security, analysis and transforming of scientific data into insights.
There are major confidential and privacy issues surrounding patient health data, but Palantir has advanced security capabilities. They should showcase how their security technology features enables the safety of patient data through purpose-based access controls, a Foundry feature. They should briefly discuss their Data Governance protocols, strategy and how it is administered.
Overall, the pandemic has accelerated their work within Healthcare and Life Sciences. Investors will observe that they signed extension contracts with the US Government National Institute for Health, the US FDA $40M Contract and the UK National Health Service (NHS England) to help track the spread of COVID-19, vaccine supply-chain management, using their software to support clinical trials and research. I believe the Life Sciences sector has the capacity to drive significant future returns. We know that Post-Covid, there is bound to be significant budget allocation towards stopping the next major pandemic. Artificial Intelligence will play a central role in helping with the development of a solution towards the next age of significant drug discovery. There are massive opportunities to apply Artificial Intelligence to Genomics and lead the next transformation in Healthcare, but we won't spend too much time on that for this article.
Brief Thoughts on Valuation:
My financial valuation thesis suggests a price target of $45-$50 based on the fact that Palantir could generate more than $1.7Billion in Revenue for 2021. I will also add that we've observed an improvement in contribution margins from 21% in 2019 to 54% in 2020 further supporting Palantir's scale. I don't expect Non-GAAP profitability in 2021. All this leads to my price target of $45-$50 suggesting a Forward P/S of 25x on my 2021 Revenue estimates or Forward EV/Sales of 24x as at the time of writing. This valuation is not unreasonable if they grow over >55%+ YoY in 2021. The biggest risk to my valuation will be the market rotation to value and the relative direction of interest rates and their impact on valuation multiples.
Bottom-Line and Conclusions:
Palantir's first Demo-day event in January was a success. After the last demo-day, the COO - Shyam Sankar stated on the earnings call that the event was well received by both investors and prospective clients. He mentioned they got more inbound calls and interested partners. I expect these series of Double click events to continue to further drive this momentum. Palantir has long been described by the press as being 'secretive' and lacking transparency. I strongly believe that Palantir's Double Click is a desire to change this narrative.
Palantir is a technically complex company making a large societal impact, but most of this impact is largely unknown to the world. My hope is that after reading this article, you'll begin to connect the dots amongst all of the partnerships that were announced over the last seven months including future announcements and see how it may tie-in to digitizing the industrial and life-science industries. I hope you get a few foundational elements of their technology and can see the impact Palantir is having in various aspects of the world's leading industries not discussed by the media (my article is only a quarter of Palantir's impact around the world, there are many areas not discussed). This is the reason I thought it would be important for Investors to get a full grasp of the future potential of both companies. If we combine IBM's AI deep expertise and Palantir's Foundry capabilities, we would realize an AI powerhouse is being built.
If you missed out on the event, I plan to do a post-analysis of the event where I will discuss the key takeaways for Investors. I will also like to learn about your expectations or takeaways for this event in the comment section. I'll wrap up by saying the current market underestimates the potential synergies between Palantir's Foundry and IBM's Watson. In a decade's time and as Double Click evolves, the world will begin to realize the enormous potential Palantir has built 'in-secret' over the last 18-years.
Thank you for reading! I appreciate your inputs.
Have a great day!