Hello everyone,

This week we will revisit Palantir Technologies (we first analyzed in December) while it was cheap. We revisit it just because this week I had a high number of investors with interest and questions. However, I present a unique angle and focus upon an aspect of the business that is rarely discussed within the Investing Community. This business is worth over $500M as a standalone and holds the future for Artificial Intelligence within corporations.

Next week, we will feature another unique disruptive and fast-growing business. We will also recap the month of February for our Investi Top-30 picks companies analyzing their earnings and performance. Enjoy and have a great weekend.

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Palantir Analysis Summary:

This analysis focuses on Foundry, Palantir's commercial business as I believe this is Palantir's untapped potential and holds the future for long-term returns for Investors
Foundry’s wide-ranging capabilities within different industries are boundless and this will continue to expand Palantir's moat within the AI Industry.
I discuss the unique competitive advantages, capabilities and features that distinguishes Foundry.
My article focuses on key takeaways from the recent demo day and earnings call to discuss implications for future growth.

Investment Summary

Everyone knows Palantir (PLTR) as primarily being a software government company that only sells their software to the US Government. There is no doubt that Gotham, Palantir's government software business is important as it generates the core of the business revenues, however, I believe investors of Palantir should focus on the vast potential that exists within the commercial business. I expect the potential from Foundry to generate the bulk of future growth over the next few years.

This article focuses on looking at the foundational elements and tenets of Foundry, the wide ranging use cases for the software and key takeaways from recent presentations for investors to expect moving forward. I will try best to explain everything in layman's language and try to breakdown any jargon. Pardon me. To understand and read more about other Palantir's product like Gotham and Apollo, you can read my past analysis.

(Source: Palantir Investor Relations) (For easy access to watch the full-demo again, review this video here.)

Foundry's Foundational Elements

The basics: We all know that Palantir builds advanced data analytics software for government and large institutions. Their software analyzes vast amount of dataset from disparate locations, decoding and making sense of trends so organizations can make better decisions. At the core for Palantir is that Foundry is used for analysis of vast amounts of data so as to give insight and drive business decisions.

The fundamental elements to how Palantir Technology products are structured into the following (think about it as a funnel) - It begins:

Data Integration – It starts with the foundation of the software, which is its ability to combine every form of structured and unstructured data hidden across various systems and departments of an organization.
Knowledge management – second, the software ensures that millions of dataset are captured, classified and codified into digital artefacts, making collective organizational knowledge accessible and organized into detailed levels so the user knows - the source, the who, the what and why etc.
Search & Discovery – third, the software then ensures all of that integration of data and information can be easily found and discovered across an organization and the user can conduct analysis to drive effective decisions
Collaboration – lastly, enabling the information to be accessible and shared by the appropriate users through enhanced visualization and a variety of means to enhance collaboration within an organization.

These are easily the best ways to understand and expand Palantir's software. If you want to learn about this structure I defined, I encourage listening to this video from Palantir's employee.

The Four Tenets of Foundry

(Source: Palantir Demo day)

At the core, Foundry is a data integration and management software with comprehensive tools and capabilities to automate complex dataset for simple business decision-making. It is utilized by commercial organizations to create a central operating system for their data. Most of these tenets are key takeaways from Foundry's Demo-day:

Ontology for Collaboration:This Ontology of information, we can think of it as a foundational data component - essentially like a dictionary or an ocean of data, concepts and subject domains of all sorts for an organization. From this ocean, you can build or take what you need for analytics or future modelling. Foundry's ontology capabilities has been improved to allow for a central data source which allows for increased collaboration across an organization or multiple industry use-cases. Additionally from this ocean, the software also enhances advanced search capabilities and no-code configuration to enable easy access to information and reporting capabilities for all types of users.
Infused Advanced AI & Simulations Capabilities: Once you have a deep ontology of data, the next thing is to use this information for decision-making. Foundry is unique in that it has everything you need for Data Science and modelling libraries. Foundry has the advanced AI capabilities of answering difficult simulation questions of “What If statements” – users having the ability to run models easily to understand the outcomes of their decisions especially if these situations are completely brand new or there is a lack of past data (this is where Foundry shines). Also, the software is extremely adaptable as new information changes in real-time. This is one of the reasons why this software is used in high-pressure environments like the US Army. The simulation capabilities is a promising feature for businesses.
Modularity of Foundry: Modularity in the sense that a system's components and its design are made so flexible so it can be separated into functional independent parts or reconstructed often to match different software needs. You can take a piece of their software and use it as needed. This word was repeated more times than any during Demo day. The focus for Palantir is that foundry can be flexible and adaptable based on the needs of an organization. This makes foundry's software agnostic. At the heart is that the client can use Foundry to take what they need and build analytics based off their preferences (small or large).
Interoperability leading to scale and future mobile offerings: The last element that Palantir has focused upon is the interoperability with other applications and software from databases to other digital platforms. This is important for the scalability because it is essential that Palantir systems can ‘talk’ or 'communicate' easily with any organizations systems. This interoperability will be leading to their mobile offering which will be key for collecting and sharing data in various forms. The interoperability features with a 3rd party data's platform discussed at the Demo day, we now know was the IBM Cloud Pak System *surprise* but there will be many more other examples of how their software can be integrated with other systems in the future.

(Source: Palantir Demo day)

Industry Wide Use Cases

(Source: Palantir Demo day)

The most exciting aspect for the future of Palantir is the wide optionality and extensive use cases for the software across so many industries. Many examples provided at Demo day or their investor relations to learn more. If I had to go through every example, it will be a long list, so I will give a high-level overview of how the software has been used across sectors. Here are few that are currently using the software:

Non-Services Sectors: These sectors are heavy asset like businesses. Palantir is helping to improve the efficiency and effective of decision-making by using their machine learning models to improve supply-chain coordination such as Rio Tinto partnership, reduce waste in the value chain, better predict future demand/raw materials and enhance operating processes in organizations that rely heavy on smooth operations. Some sectors already using the software include: Material handling and Transportation; Manufacturing; Automotive and airplane manufacturers; Airlines partnership; Oil & Gas and Renewable sectors etc.

Services sectors: Across these sectors, the similarity I found is that they are improving decision-making by minimizing risks and improving risk management based on data, increasing automation of manual and labour- oriented processes, using AI to better help customize and personalize tailored customer solutions, helping with due diligence, advanced analytics tools for developing of news drugs as seen with their software used extensively by the FDA & NHS England to improve drug developments and tracking of Covid-19. All the existing sectors currently using the software include: Management consulting; Law firms; Insurance; System integrators; Financial institutions and banking; Healthcare and Pharmaceutical industries.

I have named over 16+ industries that are using Palantir's Foundry software. Since Foundry's launch, they have helped client realize almost $500M in cost reductions, synergies and business outcomes with many more in the future.

Competitive Edge That Makes Foundry Unique

Integration power: The ability to absorb different types of data and the broad data integration capabilities with multiple applications or systems such Windows SQL, iOS, to reduce the manual/human labour to gather such data is huge. This is one of the hardest aspect of analytics and the team has focused on building their capabilities here. The ability to integrate with disparate data sources (both structured and unstructured) to extract, make connections to drive modelling and better decision making.

The modularity and interoperability: Building on the integration piece is the ability of their software to mold to any underlying infrastructure or software regardless of organizational size or IT database. Foundry can be customized to fit new user needs beyond its past capabilities of only fitting to govt systems. Additionally, Foundry is cloud agnostic regardless of it the company is on the edge or uses either public, private or hybrid cloud platform.

Full-stack analytics software: Palantir's software is mostly vertically integrated from the foundational elements of analytics data-gathering all the way up to the advanced modelling and visualization for the user level.

The intuitiveness and ease of use: The user interface level of the software is incredibly easy to use and applicable for both technical and non-technical users. It has so many drag and drop features, you'll realize this from the Demo. Most of the industry’s software caters to either groups of users and makes it easily adoptable.

I don't want to go into a full in-depth analysis again as if you combine the Foundational and the four tenets to this competitive advantages, you will find the key differentiators for Palantir. If you want more information on another aspect of their advanced competitive advantages, read more of Seeking Alpha analysis on the parallels with Microsoft.

Financials & Execution Of Foundry So far

Below, I will highlight some key takeaways from the Commercial part of the business based the recent Q4-Earnings report and call.

As you know already, Palantir’s 2020 Revenue was $1.093B of which 56% came from Government and 44% from Commercial clients. This revenue mix has improved from previous years by over 10%. Commercial grew by 22% Growth YoY to make up $482M. In general, this sector experienced a slow-down in 2020, as we saw 4% growth YoY in the quarter. hey have signed lots of new commercial clients (over 21+) that were NOT RECOGNIZED YET within the revenue for the full year of 2020 (This is what also made Q4-2020 revenue look weaker than expected). Its important to note that RPO is a key metric left out of the headlines from Q4. RPO are the Remaining performance obligations (RPO), which represents the non-cancelable contracted revenue that has not yet been recognized. Hence, we can expect more in the future.

The US part of the business is growing the fastest as they saw 107% YoY revenue growth from US Commercial customers. This signals that the international commercial sector for the business is still largely untapped and through IBM's sales team that exist in 180+ countries, expect to hear more.

Palantir's Customers: They finished the year recognizing a total of 125+ customers. Although, Top 20 concentration risk is decreasing by (6% YoY), those heavy weight still provide a bulk of the revenue for the company. Also, Palantir is increasing the revenue they get from existing customers from $495M in 2019 to $663M in 2020 while the average revenue per customer increased by 41% YoY to around $8M. This is a good signal overall as it means existing customers enjoy the software, are upgrading and they are successfully upselling. This is important because they do not always need to attract new customers to keep up revenue stable in the future. Overtime, I believe the customer concentration risk will reduce. Also note that the contract sizes and deals are getting bigger.

Contribution margins are important for Palantir - It is a measure of their efficiency in selling and delivering software to customers. For the FY 2020, this number improved massively from 21% CM à 54% CM in 2020. This means they are improving the way they approach customers especially utilizing software like Apollo. There are more automatic set-ups when setting up new clients and improvement in the number of deployments necessary. This is something they focused upon in recent year years and is important for scale.

Risks To Consider

We have to also to be cautions and consider some key risks:

Palantir's management has a lot of execution to prove with Foundry with regards to product market fit and their ability to acquire new commercial clients. We know that have started building the seeds. Also, the reputation for the reliability of Palantir's software within the US Government and military is enough credibility to attract new enterprise customers.

Brewing Competition within the Advanced Analytics sector is hot, most especially within the Commercial sector. However, I believe that competitors such as (C3.ai) and (SPLK) address different niches in analytics. They also do not have a full-stack layer and the advanced analytical integration capabilities of Foundry's. I have also outlined all the reasons I believe makes Palantir unique above that most competitors cannot match.

They have a small margin for error with customers due to the current customer concentration of the Top-20 clients. Moving forward, with the IBM partnership and expansion into the private sector, I see this customer risk reducing overtime and being minimized as they capture new customers.

Refusal to adopt Palantir’s software and longer sales cycles: Due to the fact that the company has spent most of its years within Government sector. They may lack some experience, market-fit or not enough credibility to make their software appeal to commercial clients (relative to competitors who are strictly providers of analytical tools to private companies who already have a core competency here). They may encounter clients whose systems cannot not 'talk' with Foundry or clients with archaic systems. Palantir has realized this problem which is why on Demo day, they emphasized the interoperability and modularity of the software, it appears they have been working on this issue. However, as I mentioned, with the new launch and updates to Foundry, I see this challenge reducing overtime.

Going forward – Future growth expectations

(Source: Palantir Demo day)

Palantir and IBM Partnership: This partnership will be massive for the future of Foundry. They are partnering to help businesses easily deploy powerful AI applications to unlock business value. Expect more as Foundry 2021 updates merges with a giant IBM Cloud Pak for Data. They will benefit from the scaling of IBM’s 2,500-person sales force across multiple countries. Also, don’t forget that Palantir since it was founded in 2003 has not had a sales team until 2018/19. Hence this bump will further drive down the Customer acquisition costs by reducing sales cycles and kick-in Foundry's potential. If you want more on the software's capabilities, read about the partnership from IBM.

Opportunity for Commercial expansion with international organizations: This is another exciting part of the future is not only their 100% growth amongst US corporations but, the growth to expect from more international partners using IBM's international presence.

The Bottom Line

I strongly believe that in 2020, Palantir was primarily focused on helping Covid clients such as the world's national governments since Covid came as a surprise. They could not focus too much on the commercial side and also consider that many businesses were not spending aggressively until businesses got clarity on the future. This is why later into the year including the IPO, we heard lots of the new agreements and sign-ups in Q4-2020.

Secondly, there were lots of revenue that will be recognized going forward based off many of those partnerships meaning this fourth quarter is a bit deceptive. For management to guide to $4B of revenue until fiscal 2025 signals great confident on the future based behind-the-scenes discussions. Most especially with a growing backlog of $2.8B in deal value, the likelihood of achieving these goals are fully possible considering they could sign such an amount in just one quarter. Moving forward, the strategy for Palantir will be the ability to sell to smaller and medium-sized customers and attract 'smaller' deals with short sales cycles such as the way Snowflake (SNOW) scales.

Third, the best part of Foundry (and management really emphasized) is that we will see more from the commercial since they are less than <5% penetrated of the top corporations of the world. Don't forget, this is a 'relatively' new side of the business that they only started focusing upon in recent years, hence they are just beginning.

(Source: Palantir Investor Relations)

Finally, I have analyzed and provided all the competitive advantages that distinguishes Foundry from the current market competition within the Advanced Analytics and AI Sector. Palantir’s focus on flexibility, modularization and interoperability will help them in this new endeavor. There will be an upcoming demo later this year that investors will need to focus upon to learn more details - I will be providing a follow-through.

The future is bright. Can you imagine - Adding the future of Foundry's potential together with the already stable government revenues from the US Government (note that these contracts are massive). I’ll leave you to do the imagination.

I’ll wrap up with a note from CEO, Alex Karp from the earnings call “Any case, we hope those of you on this call who are current investors stay with us; and those of you who'd prefer a more short-term focus, that you choose companies that are more appropriate for you.” This reminds me very much about Elon Musk or Amazon with Jeff Bezos in the early days of Amazon. It is about the future.

(Source: Koyfin, Palantir Q4 Earnings Transcript)

Thanks so much for reading Palantirians!

(Source: Palantir Investor Relations)

Next week, we will feature another unique disruptive business with massive competitive advantages and recap the month of February for our Investi Top-30 picks companies. Enjoy and have a great weekend.

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