The amount of data generated in the course of a day is truly staggering. Back in 2018, Forbes estimated that 2.5 quintillion bytes of data were created each and every day, and technology becomes more integrated into everyday life, the rate of data creation will continue to increase. The data each of us generates over the course of a day has tremendous value to businesses and advertisers. For example, Amazon collects data on your shopping habits and uses it to adjust prices up and down or to suggest items you might want to add to an order. Facebook famously collects user data and uses it to help advertisers target specific consumer groups.
However, much of the data generated by everyday people using digitally enables systems is "unstructured", meaning that it isn't organized in a pre-defined manner and thus does not fit into a pre-existing data model. This fact makes it very difficult for businesses to use the data to make their tactics more efficient or profitable. Palantir, a software company founded in 2003 by famed venture capitalist Peter Thiel, aims to solve this problem, for a fee.
Palantir produces software that enables organizations to analyze unstructured data and turn it into actionable information. Historically, the company's largest customers have been government agencies, financial institutions, and healthcare organizations that have access to large unstructured datasets that have the potential to yield valuable strategic insights if analyzed properly. Although the company has never turned a profit in its 17 year history, when Palantir IPO-ed via a direct listing on September 30th of this year, investors jumped at the chance to get in on the action. The company ended its first day on public markets with a market cap of $21B, which has since risen to nearly $40B:
In 2019, Palantir reported around $600M in revenues, but in its first quarterly report since being listed on public markets provided guidance that suggested revenues for 2020 would be closer to $1B and noted that year-over-year quarterly revenue growth was around 50%. These impressive growth statistics and the company's 180% YTD return has attracted the attention of both growth and momentum investors. Correspondingly, Palantir holds a spot on EEON's list of Fastest Growing Stocks as well as Best Momentum Stocks.
However, as the company's stock ratings clearly show, rapid growth in revenues and share price has come at the cost of a reasonable relative valuation. Double clicking into Palantir's Value and Profitability ratings shows that the company is currently trading at a P/S ratio of 65x, a P/B ratio of 77x, and currently has a profit margin of -100.46% meaning the company is expending more than twice what it earns. Similarly, Palantir's TTM ROA and TTM ROE are -45% and -94% respectively. These metrics seem even loftier when compared to Amazon, which is also valued at a premium (P/E > 90x), but has a P/S of 4.5x, a positive profit margin, and positive ROE/ROA.
On the other hand - a high valuation has to be considered in tandem with the potential for growth and ultimate profitability. Palantir's focus on developing highly sophisticated data analytics software capable of turning complex data into predictive tools is an incredibly attractive proposition for the company's clients. As the role of data in daily life continues to expand and companies continue to see the value of data, Palantir's products will see increased demand. The company's lack of profitability is concerning, but not unusual, and if it proves temporary, Palantir's powerful software and experience selling to large, institutional clients will send shares soaring.