It really raises an eyebrow how many of these companies lack profits.
Palantir was founded in 2003. After 17 years of work, they are losing more money in a quarter than most people can earn in a lifetime.
I personally think the situation is stupid and it is foolish to "invest" in such a company. However, in the event that this works out, there are going to be some great counterexamples to the idea that only governments can think long term. If this path ever leads to profits it is a plan executed on a grand scale. This is a baffling form of might-be capitalism.
Yeah but ... consistently? Quarter after quarter? In advance of an IPO? No obvious uptrend in profit despite rising revenue? Obviously they won't get rich following my advice but I don't want to be on the hook providing the fuel for that fire.
I'm looking forward to seeing who will buy this thing; risky is an understatement looking at the P&L graph in the article. Lucky this youthful startup has only been around for 17 years. Maybe once it can legally start drinking it will find its way.
Amazon lost money every quarter as well for years. There is a huge market in government and defense IT globally that Palantir could potentially tap into. Historically, it's been IBM's gig, but that could change very quickly.
Features, requirements, scope, datasets. It's not like services are cheap and easy to make.
The other part of .Gov contracting is integrating so tightly that you become a defacto standard that is not easily replaced. Then lobbying to ensure you keep that position.
This is a result of low interest rates in the last 20 years. There is an insane amount of institutional money looking for a home, and it is also impossible to get decent yields with money right now. Therefore any businesses with potential to become huge, will be happily funded for a very long time.
This is only going to get worse due to the insane stimulus due to the coronavirus.
It is almost as if money now has so little value that losing as little of it as possible is what investors are looking for, aka negative interest rates by another name.
I wouldn’t blame the companies for this, this is a result of governments not willing to allow recessions in the early 00s, then in 08, and now. But it has serious long term effects which are hard to understand as it’s so complex.
>But it has serious long term effects which are hard to understand as it’s so complex.
This paper attempts to study it: https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf, and found that artificially low interest rates create zombie firms that could not survive without such low rates, and "that zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms.".
Money is a game we play to organize how we, as a society, spend our resources. It works because:
1. Usually, at smaller numbers, you get money by doing something for society: i.e., you have a job.
2. At larger numbers, money is economic decision-making power: people with the money decide what products get built, what movies get made, and so on. And usually, if you make a good decision with that money, you end up with more money and thus more power to make economic decisions; and if you make a bad decisions, you end up with less money and less power to make economic decisions.
Obviously these aren't always true. I'm not an anti-capitalist or a lassaize-faire libertarian: I want rules to cause our system to approximate the above two patterns as closely as possible.
I think a lot of economics is neither rational or irrational. Emergent systems tend to be like this, and it contradicts a lot of our intuition about how systems should be.
I think we should look at the stock market as part of the monetary system. In some sense, this is at the heart of "capitalism." Capitalism has become a very complex term after 200 years of complex use, but in most versions it's dated to the Dutch and British empires' systems of chartered companies, tradeable bonds, and stocks.
Bubbles occurred from the very start, which basically means unsustainably irrational. But (imo) it's a mistake to assume that anything short of a bubble is/was rational. The textbook (rational) definitions of "value" are only determinable in retrospect. But, this is pretty theoretical.
It's quite rare that a traded company justifies its value in dividends, regardless of profit. This is why the total market cap keeps growing.
It's not uncommon for a company that could have been profitable to instead choose to invest in getting even bigger reach, and potentially getting an even bigger profit down the road - and VCs tend to press hard for this course. For some (many even) it's unsustainable and kills off what would otherwise have been a nice million dollar company in an attempt to turn it into a billion dollar company. But for some it works out, and the investments do really pay off - and they do so massively. So long story short, it's quite possible for a company to run at a loss for years, but be able to turn a profit at any time, if they just ease their foot off the pedal. Others really are burning through more money than they'll ever know how to recoup. But you really need to dig into the details to tell the difference.
If you read the S-1, you'll notice that Palantir's costs are front-loaded, and their revenues are back-loaded, on a per-deal basis. A given deal both costs them far more its first year, and generates far less revenue in its first year, than it does in any subsequent year. This is strikingly similar to SaaS economics. (Palantir is not a SaaS, but its cashflows and long-term margins look a lot like those of a SaaS.)
Government contracts take a long time to close, but once closed they generally stay closed and often expand. Defense, in particular, is the most enterprise-y of all enterprise clients. So it's reasonable for Palantir to outlay a large fixed cost (in the form of sales, consulting, and integration) in exchange for a perpetual, increasing annuity. Their quarterly losses are a result of them closing many new deals that are in the integration phase and haven't yet started to monetize fully. Notably, Palantir's per-deal long-term margins (70-90%) are closer to those of a SaaS than to those of a Big Four consultancy (~30%).
The "lose money now, make money later" playbook is common to all SaaS companies and works phenomenally well. Palantir's twist is that they do significant integration and custom work up front, at the expense of less sales staff. If you dig into their numbers, it's hard to argue they haven't made a strong case that this model works.
So while I understand the skepticism at their high-level metrics, the details paint a more optimistic picture than "low interest rates made this bad company viable" (an argument I've seen elsewhere). No IPO investor wants to subsidize losses indefinitely, after all.
This is common to consulting companies, Palantir is more like McKinsey & Company/Accenture/The Boston Consulting Group.
The recent deals with the UK gov for £1 are classic get your foot in the door then bleed them dry once the switching cost is high.
"Make money in the long run" is a fine strategy, but as Keynes quipped "in the long run, we're all dead". 17 years is more than enough time have exploited quite a few long-term deals.
It isn't like governments aren't aware of these tactics. They can and do work to substitute out vendors once they get too expensive. In fact I've heard whispers of several customers of Palantir doing just that.
(Disclosure: I work for a competitor of Palantir.)
> as Keynes quipped "in the long run, we're all dead"
This is one of the more over-used quotes. In this case, it's not particularly relevant since US fiscal and monetary policy is almost entirely designed around incentivizing long-term investment over short-term gains.
If Palantir is indeed a good "long run" bet, then every pension fund, 401(k), mutual fund, or ETF (read: most institutional investors) should in theory eat it up after the IPO.
To borrow another pithy quote:
"Show me the incentive and I will show you the outcome."
or maybe not in theory but in practise, the entire stock market performance has shifted so strongly towards technology companies due to the general low growth environment we're in that the whole thing comes crashing down in five to ten years because there's actually no business model
In practice, the entire stock market has reverted to a comically long-run view of the economy writ large. That's why despite a historic pandemic, unemployment, and GDP contraction, most indexes (including the un-weighted ones) are at close to all-time-highs. It's all "priced in".
Actually they are cash break-even, the loss they report is due to GAAP-rules not allowing you to recognize cash on your balance sheet as revenue until you delivered the service.
For the next 12 months they are sitting on 280.2 mil customer deposits that will become irrevocably delivered (and turned into revenue) and 215.4 mil revenue that is collected but not recognized.
For more then 12 months they have 74.3 million in deposits and 118.6 mil deferred revenue collectes.
Given the stickiness of the client and the product I think you can assume this cash will turn into revenue and then the picture looks quite different with an operating loss of 576 mil and 688 mil of non-recognized revenue, they are generating 112 million in excess cash.
That's probably also the reason they are not raising additional cash in the IPO. Their customers are funding the company completely now.
What Palantir's S-1 told me (along with knowledge of their business model) is that they have to sell government agencies pretty hard -- sales/marketing to the $ tune of 100% of the gross margin -- and then spend a lot of money to build the analytics and deliver the goods. (lots of hidden costs in "forward deployed engineers", which have to be assigned to every customer)
They are not a software company -- they're a services company that builds + uses software to deliver insights. That's a very different profit situation than purely software. If they even get out of the hole to begin with.
31 comments
[ 2.0 ms ] story [ 75.3 ms ] threadPalantir was founded in 2003. After 17 years of work, they are losing more money in a quarter than most people can earn in a lifetime.
I personally think the situation is stupid and it is foolish to "invest" in such a company. However, in the event that this works out, there are going to be some great counterexamples to the idea that only governments can think long term. If this path ever leads to profits it is a plan executed on a grand scale. This is a baffling form of might-be capitalism.
I'm looking forward to seeing who will buy this thing; risky is an understatement looking at the P&L graph in the article. Lucky this youthful startup has only been around for 17 years. Maybe once it can legally start drinking it will find its way.
Government and defence IT is a service business - where do you invest the money?
Note: I'm not saying they don't invest the money, just curious where it goes.
The other part of .Gov contracting is integrating so tightly that you become a defacto standard that is not easily replaced. Then lobbying to ensure you keep that position.
This is only going to get worse due to the insane stimulus due to the coronavirus.
It is almost as if money now has so little value that losing as little of it as possible is what investors are looking for, aka negative interest rates by another name.
I wouldn’t blame the companies for this, this is a result of governments not willing to allow recessions in the early 00s, then in 08, and now. But it has serious long term effects which are hard to understand as it’s so complex.
This paper attempts to study it: https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf, and found that artificially low interest rates create zombie firms that could not survive without such low rates, and "that zombies weigh on economic performance because they are less productive and because their presence lowers investment in and employment at more productive firms.".
What do you think all those expenses are? Someone else’s income.
And why/how we allocate these fictional "tokens" to people and collections of people.
1. Usually, at smaller numbers, you get money by doing something for society: i.e., you have a job.
2. At larger numbers, money is economic decision-making power: people with the money decide what products get built, what movies get made, and so on. And usually, if you make a good decision with that money, you end up with more money and thus more power to make economic decisions; and if you make a bad decisions, you end up with less money and less power to make economic decisions.
Obviously these aren't always true. I'm not an anti-capitalist or a lassaize-faire libertarian: I want rules to cause our system to approximate the above two patterns as closely as possible.
I think we should look at the stock market as part of the monetary system. In some sense, this is at the heart of "capitalism." Capitalism has become a very complex term after 200 years of complex use, but in most versions it's dated to the Dutch and British empires' systems of chartered companies, tradeable bonds, and stocks.
Bubbles occurred from the very start, which basically means unsustainably irrational. But (imo) it's a mistake to assume that anything short of a bubble is/was rational. The textbook (rational) definitions of "value" are only determinable in retrospect. But, this is pretty theoretical.
It's quite rare that a traded company justifies its value in dividends, regardless of profit. This is why the total market cap keeps growing.
Government contracts take a long time to close, but once closed they generally stay closed and often expand. Defense, in particular, is the most enterprise-y of all enterprise clients. So it's reasonable for Palantir to outlay a large fixed cost (in the form of sales, consulting, and integration) in exchange for a perpetual, increasing annuity. Their quarterly losses are a result of them closing many new deals that are in the integration phase and haven't yet started to monetize fully. Notably, Palantir's per-deal long-term margins (70-90%) are closer to those of a SaaS than to those of a Big Four consultancy (~30%).
The "lose money now, make money later" playbook is common to all SaaS companies and works phenomenally well. Palantir's twist is that they do significant integration and custom work up front, at the expense of less sales staff. If you dig into their numbers, it's hard to argue they haven't made a strong case that this model works.
So while I understand the skepticism at their high-level metrics, the details paint a more optimistic picture than "low interest rates made this bad company viable" (an argument I've seen elsewhere). No IPO investor wants to subsidize losses indefinitely, after all.
This is common to consulting companies, Palantir is more like McKinsey & Company/Accenture/The Boston Consulting Group. The recent deals with the UK gov for £1 are classic get your foot in the door then bleed them dry once the switching cost is high.
It isn't like governments aren't aware of these tactics. They can and do work to substitute out vendors once they get too expensive. In fact I've heard whispers of several customers of Palantir doing just that.
(Disclosure: I work for a competitor of Palantir.)
This is one of the more over-used quotes. In this case, it's not particularly relevant since US fiscal and monetary policy is almost entirely designed around incentivizing long-term investment over short-term gains.
If Palantir is indeed a good "long run" bet, then every pension fund, 401(k), mutual fund, or ETF (read: most institutional investors) should in theory eat it up after the IPO.
To borrow another pithy quote:
"Show me the incentive and I will show you the outcome."
- Charlie Munger
or maybe not in theory but in practise, the entire stock market performance has shifted so strongly towards technology companies due to the general low growth environment we're in that the whole thing comes crashing down in five to ten years because there's actually no business model
Anyone want to throw me $1B? I'll just burn it over 20 years but maybe in 2070 I'll make a profit.
Shocked! I am shocked I tell you!
> This is a baffling form of might-be capitalism
This is just plain old capitalism. They were speculating on hollow companies and selling snake oil long before 1929.
For the next 12 months they are sitting on 280.2 mil customer deposits that will become irrevocably delivered (and turned into revenue) and 215.4 mil revenue that is collected but not recognized.
For more then 12 months they have 74.3 million in deposits and 118.6 mil deferred revenue collectes.
Given the stickiness of the client and the product I think you can assume this cash will turn into revenue and then the picture looks quite different with an operating loss of 576 mil and 688 mil of non-recognized revenue, they are generating 112 million in excess cash.
That's probably also the reason they are not raising additional cash in the IPO. Their customers are funding the company completely now.
What Palantir's S-1 told me (along with knowledge of their business model) is that they have to sell government agencies pretty hard -- sales/marketing to the $ tune of 100% of the gross margin -- and then spend a lot of money to build the analytics and deliver the goods. (lots of hidden costs in "forward deployed engineers", which have to be assigned to every customer)
They are not a software company -- they're a services company that builds + uses software to deliver insights. That's a very different profit situation than purely software. If they even get out of the hole to begin with.