2 Reasons You Should Avoid Palantir Stock
Palantir Technologies — a data mining company — went public September 30 in a direct listing that values the company at $21 billion.
I see two reasons not to buy this stock:
- It burns through piles of cash
- Its governance structure is investor unfriendly
What is Palantir?
Palantir — founded in 2003 with capital from investors including the CIA — provides software to help organizations analyze data.
For example Palantir provides tools that help Immigration and Customs Enforcement (ICE) conduct deportation raids. These tools include Falcon which “enhances data accessible” to ICE investigators “involving the illegal movement of people into, within, and out of the United States,” AP reported.
Palantir used a direct listing — in which a so-called reference price is set — to enable current shareholders to sell their shares. The stock closed its first day of trading at $9.50 a share — below its $10 opening price — but above the range at which the shares traded in in private hands in August ($7.31) and September ($9.17), according to the Wall Street Journal.
Palantir’s financial results show big losses and modest — though promised increases — in revenue growth. Since its founding, Palantir has lost money every year — posting net losses of about $580 million in 2018 and 2019. Its 2019 revenues grew 25% to about $743 million. The good news: last month Palantir said it expects 41% revenue growth to $1.05 billion for 2020, according to the New York Times NYT .
Palantir is worth a bit more than it was in 2015 — when investors valued the company at $20 billion. Still, its $21 billion valuation is a bit below the $22 billion valuation that bankers were floating before the direct listing, according to Silicon Valley Business Journal.
Palantir’s Cash Immolation
Palantir is a cash furnace. For example, in 2019 its operations consumed $165 million in cash — which represented 22% of its revenue. Its cash burn increased from the year before. In 2018, Palantir’s negative cash flow from operations was $39 million — its 2019 cash burn soared a whopping 323% while its revenues rose 25%, according to its prospectus.
Palantir’s product is very expensive to sell and the company has very high overhead costs — accounting for a combined 105% of revenue last year. For 2019, for example, Palantir’s sales and marketing expenses of $450 million represented 61% of its revenue while general and administrative costs — of $321 million — were another 44% of revenue.
After 17 years, Palantir has not figured out how to make a profit. Will its executive team learn how to do that now that its shares are publicly traded?
Palantir’s Investor-Unfriendly Governance Structure
To invest in Palantir shares is to be happy that its three co-founders — investor Peter Thiel, CEO Alex Karp and President Stephen Cohen — could gain more control as they sell their shares. The Journal noted that Palantir has ”one of the most aggressive governance structures ever seen.”
As the Journal reported, “Through a unique feature of the voting structure, Mr. Cohen, for example, could still effectively control the company by owning a tiny fraction of the shares.” The Journal noted that Palantir is limiting the amount of shares that existing shareholders can sell to 20% until early 2021.
This could be bad news for investors concerned about its “penchant for secrecy.” According to BusinessInsider, Rep. Alexandria Ocasio-Cortez asked the SEC to investigate Palantir’s disclosure practices.
For example, Ocasio-Cortez is concerned that in 2009, Palantir’s shareholder report revealed that the CIA’s venture arm — In-Q-Tel — held 10% of Palantir. However, she noted, its S-1 “did not say whether that investment was still in play or how many Palantir shares In-Q-Tel held.”
She also expressed concerns about Palantir’s contracts with foreign governments, some of which — including Qatar — she noted are “known to engage in corrupt practices and human rights violations,” according to BusinessInsider.
Finally, Ocasio-Cortez cited “a lack of transparency regarding Palantir’s board member Alexander Moore [a member of Palantir’s audit committee] and its corporate-governance oversight concerning a personal $25.9 million loan made to Cohen.”
Indeed, Palantir’s S-1 makes note of a special compensation committee of its board — including Moore — that “approved a loan repayment and limited forgiveness agreement” of a $25.9 million loan to Cohen made on November 10, 2016 that had not been repaid as of August 6, 2020. The agreement settled most of Cohen’s debt in exchange for 3.5 million of his Class B shares.
So many questions are raised by this: What was the loan to Cohen used for? Why did Palantir’s board decide it would benefit shareholders to lend him this money? Why had Cohen not repaid any of the loan nearly four years later? Why was it in Palantir shareholders’ interest to accept some of Cohen’s class B shares as repayment rather than cash?
I will update this post should Palantir respond to my request for comment.
Palantir — which moved its headquarters from Palo Alto to Denver — has concluded that Silicon Valley lacks sufficient respect for its mission.
As Karp wrote in the company’s S-1, “Software projects with our nation’s defense and intelligence agencies, whose missions are to keep us safe, have become controversial, while companies built on advertising dollars are commonplace.”
If Palantir’s executives are able to achieve faster than expected growth in the next few years, now will look in retrospect to be a good time to invest in its stock.
If the company does not grow faster and continues to burn through cash, Palantir’s direct listing will prove to be better for its insiders than for the investing public.