Palantir: The Key Takeaways From FoundryCon 2023 (NYSE:PLTR)

What is the Goal of This Article

The goal of this article is to share my takeaways from last week’s Palantir Technologies Inc. (NYSE:PLTR) FoundryCon 2023 U.S. user conference. There were so many little nuances and trends to pay attention to from the conference if you were a Palantir shareholder or thinking about investing in the company for the long term. There are some things we need to ask ourselves and answer before we invest in Palantir.

Now, in full disclosure, I am a little biased on Palantir as a stock, as it is my second largest holding behind Nvidia Corporation (NVDA). As usual, this is not investing advice but for informational purposes only, and I recommend you do your own homework on Palantir before investing. Now let’s discuss what questions we should be asking and answering regarding the company and stock.

Are the Problems Large, Impactful, and Complex to Solve?

The first thing I ask myself when it comes to investing in a company is, “What problems do they solve? Are the problems large and complex? And by solving them do they offer quantifiable value realized by the customer?” Palantir answers these questions in spades and has numerous examples that we will discuss from FoundryCon 2023.

My first observations from the FoundryCon 2022 and 2023 conferences surround the customer types Palantir has acquired & their industries. We will talk later about this in further detail, but many institutional investors, analysts, and critics got it wrong, saying Palantir was just a government consulting services company. FoundryCon 2023 along with their financial results the last two years indicate this is far from the truth. There were over 200 current and potential customers in total that attended this year’s FoundryCon. Some of the Enterprise and Commercial customers that presented on their experiences with Palantir Foundry and Apollo software were Dish (DISH), PG&E (PCG), Southern California Edison (EIX), JD Power, Tampa Bay General Hospital, and Integrity Tool and Mold.

These organizations had data accuracy issues, decision making challenges, too many tools and data, siloed communication and teams, regulatory challenges, and all of this leads to cultural and change management issues within their perspective company. These problems are very complex to solve, but if they are resolved, then the organization can deliver true alpha in operational efficiencies, revenue growth, and differentiation against the competition. We learned the alpha created delivers a massive ROI for the customer purchasing Palantir software & leads to new and expansive ways they use the solution within their company.

What are the Critics Saying About the Stock and Solution?

As mentioned earlier, institutional investors and analysts have misunderstood Palantir as a primarily Government focused company that is more of a services organization than a software company. Now Palantir did originate in 2003 focusing more on solving security challenges, war time efforts, and working with the clandestine community for the United States and its Western Allies.

However, Palantir was founded as an official corporation in May 2003 by Peter Thiel (co-founder of PayPal), as a “mission-oriented company” which could apply software to “reduce terrorism while preserving civil liberties,” similar to PayPal’s fraud recognition systems that his team helped create. So the concept and software was born out of solving the security challenges at the commercial company PayPal (PYPL). You can read more on the history of Palantir, the advantages they bring to commercial and government customers in my other Seeking Alpha articles here. The point I am making here is the company was started out of solving complex security issues for a commercial company (PayPal), and then applied this same approach for other challenges the United States Intelligence Community (USIC) and the United States Department of Defense (USDOD) were facing for counter-terrorism.

Years later, Palantir built Foundry out of a realization that both public and private entities faced similar challenges that could be solved via data, per their S1 (see below).

As we expanded from our government work into the commercial sector, we saw that private enterprises had similar problems to those that affected organizations in the public sector.

We also learned that big data isn’t valuable just because it’s big. We believe that the integration and joining of different datasets is what matters most. Data integration also happens to be among the hardest problems to solve.

Fast forward to last Q3 2022 and Palantir generated $204M in Commercial revenue recognized, which was 43% of total revenue for Q3. Palantir has been consistently growing their Commercial customer base as the total customer count at the end of Q3 was 228.

The final knock on Palantir that critics consistently express is the fact that Palantir is not GAAP profitable. However, Palantir is focused on reinvesting in its people and keeping top talent with their stock based compensation program and still the company had a free cash flow of nearly $37M in Q3. The fragility of Palantir that the media and institutions express is not warranted, as the company has $2.4B in cash and equivalents and $0 debt. In essence, the company can continue to operate at strength growing customer count and adoption of their platform in the current economic environment. If you want to learn more how this Palantir business model yields a compounding effect of land and expand revenue, read my other articles here.

Does Palantir have Pricing Power due to Offering Something Unique and Superior to its Competition?

Back to FoundryCon 2023, we learned that Palantir definitely has pricing power and offers quantifiable value to customers that they can only reach with the Palantir ontology. For example, the data accuracy and data decision making in near real time helped Southern California Edison analyze 150 million weather forecast points to help prevent wildfires. When disasters occurred like wildfires, Southern California Edison was able to decrease their notification time to customers from hours to minutes and provided a 60% reduction in missed customer notifications.

This was not the only energy company to present at FoundryCon 2023 as Palantir has really infiltrated the industry and Pacific Gas & Electric also presented their results from Foundry. PG&E was able to reduce the acreage burned in 2022 wildfires by 99%, and 65% reduction in ignitions. Both energy customers were able to forecast outages more accurately ahead of time, predict transformer failures, and respond to customer outages faster.

In the healthcare industry Palantir has customers like the CDC and Tampa Bay General Hospital (“TBGH”). TBGH was able to decrease hold times for patients by 28% from 5.8 to 4.2. Nurse management time spent managing patient placement decreased by 83% from 1 hour to under 10 minutes. Palantir was able to help TBGH create a custom, live 360 view of patient counts per provider during hurricane Ian.

So I have shared examples that truly dictate the impact of life or death, whether it is wildfires, hurricanes, pandemics, or general physician care Palantir has made impact at the highest levels. These kinds of results are not easy to create and leads to more creative usages of the software to solve new problems for customers, hence the 119% net revenue retention Palantir generates. The customer presentation that stood out to me the most was that of CEO for Integrity Tool & Mold. This is a SMB custom-manufacturing molds company that has only 200 employees and generates $118M in revenue annually but procured the full Foundry solution. The CEO said it was the biggest investment for the company other than physical manufacturing equipment, which is the backbone of their company.

There were so many quantifiable value results that Foundry delivered for customers at FoundryCon 2023, I can’t list them all here, but you can watch all the presentations here.

Are there Network Effects and High Switching Costs?

One of the constant themes throughout FoundryCon 2023 is how the software is a social platform that creates collaboration and cross business communication to drive business results. This is a testament of the power of the software, data accuracy, and effectiveness of business outcomes the ontology function delivers to customers. In almost all presentations customers spoke on the power of the ontology that Palantir Foundry delivers, as it is like a living breathing organism of the business. The reason I say this is because the ontology is one of the biggest differentiators against all other solutions in the market, because once that is created you can create a digital twin of your company and make proactive real-time decisions. This allows business units to do predictive forecasting and testing if certain decisions are made, what is the trickle-down effects to the other parts of the business.

Another key differentiator is that due to Palantir’s first customer base they had to build everything with security first principles. By Palantir meeting all the stringent regulations, compliances, and security frameworks that the United States Intelligence Community (USIC) and United Department of Defense (USDOD) require, it made their solution more secure than any commercial products out on the market. Palantir’s federal cloud service offering received a DOD Impact Level 6 (IL6) Provision Authorization from the Defense Information Systems Agency (DISA) in October of 2022. This is the highest level of accreditation from DISA and Palantir joins Microsoft (MSFT) and Amazon Web Services (AWS) as the only cloud offerings to have IL6 accreditation.

Here is an excerpt about IL6 from the press release when Palantir got their accreditation.

IL6 is a strict security and compliance standard required to process classified data for cloud-based workloads. Palantir Federal Cloud Service IL6 is designed to serve US federal entities, including the Department of Defense and Intelligence Community, in their most sensitive defense and national security missions.

By expanding its cloud capabilities to this new DoD IL6 Secret region, Palantir delivers upon its unparalleled experience developing operational software solutions across all classification levels, and establishes a foundational technology for Joint All-Domain Command and Control (JADC2), offering complex global cloud solutions to meet the next decade of national security objectives.”

By Palantir obtaining the most difficult security accreditations for the U.S. Government, it provides a peace of mind and competitive edge to all other commercial competitors. Commercial customers can confidently know ahead of time that Palantir checks the highest security frameworks and requirements and will not be a reason Palantir would lose a deal for not being secure enough.

The other thing you consistently heard from customers at FoundryCon 2023 is because of the social nature of the platform, it breeds new ideas and use cases for alpha for different parts of the business. This is a great example of why Palantir says it is the “Ontology-Powered Operating System for the Modern Enterprise,” because you can truly have all your company data built into an ontology and then create applications on top of that ontology. Palantir Foundry typically has high network effects within an organization as the value and alpha it delivers grows as the more business units get exposed to the software and new use cases are born.

This leads me to the next part of what we learned at FoundryCon 2023, there were three new products launched in Foundry. Palantir Process Mining & automation Suite, Dynamic Scheduling Primitives, and Foundry’s Marketplace Developer Suite. I am only going to touch on the Marketplace Developer Suite in this article, as this allows customers to build and launch data products they build in Foundry and deliver them as their own SaaS solutions to customers. This screams network effects as well, and a prime example of this is the Skywise product that Airbus built on this suite before it was an official product. Airbus (OTCPK:EADSY) was able to create the Skywise application which is now the industry standard operating system for most airlines, manufacturers, and contractors. This industry data platform helps address aircraft operation challenges and delivers such a large ROI it caused network effects that other airlines had to adopt it to keep up. You can read more about that and other use case studies on the Marketplace Developer Suite here.

We have established that Foundry and Palantir solutions overall have high network effects which is why they have a Net Revenue Retention of 119% currently. Now let’s find out if there is also high switching costs for customers with this platform. Customers need to import as much of their data as possible to create an effective Foundry Ontology that transforms your data, models, and processes into a dynamic, actionable foundation that drives better decision making. Once a customer goes through this process and spends the investment both from an OPEX and CAPEX perspective, it is highly unlikely they will want to switch to another solution. Besides the cost and planning invested to make this work, the other reason there are high switching costs is, because multiple business units will see exponential ROI over time leading to customers wanting to spend more to expand their Foundry platform. All we need to do is look at the numerous customers that have invested in expansion contracts past their original purchase. Here are just a few of these expansion contracts and links for you to dig into further. This validates the success of the Palantir business model of:

Stage 1: Acquire the customer; Stage 2: Expand with the customer; Stage 3: Scale with the customer and possibly its customers

• Sompo Holdings (OTCPK:SMPNY): $150M, $500M, $50M
• Hyundai (OTCPK:HYMTF): $25M, $20M
• US Department of Health and Human Services: $17M, $31M $90M
• Food and Drug Administration (FDA): 21 Forward Pilot Program, $22M
• Army: $450M, $116M, $100M (Not the full list of Army contracts)
• United States Space Systems Command (SSC): $121M, $54M.

What Kind of Temperament and Expectations do you Need to have as an Investor of Palantir?

Palantir is a mission-driven company and one that puts the customer first, understanding that if they do this exceptionally well, ensure that value is realized everything else will fall in place for shareholders, employees, etc. This company is primarily engineering, and outcome focused, and this is a majority of their headcount, as they are in their infancy of building out a sales organization. This is unique in that this company was private for 17 years and was delivering a product that had significant competitive advantages in the market but didn’t have much experience in how to get the message to the public. Their CEO, Dr. Karp, was their only salesperson for the longest, and they have only been publicly traded since 2020.

So, in a lot of ways, this company still operates like a startup and is still building out its sales training program. Palantir is just now participating in the standard technology marketing activities that companies do to get their message out and new customers. For example, 2021 was their first year for a user conference for Foundry customers, they just started doing commercials, sponsoring security and sporting events, web ads, social media participation, and partnerships with channel partners to scale their business.

This company is focused on investing in its customer outcomes, technology, and employees first opposed to focusing on playing the Wall Street game. You will never hear CEO Dr. Karp promise the company will be profitable right away or that the share price is his focus. Now, don’t get me wrong you can’t go to extreme in either spectrum because shareholders and employees must see there is a bright light at the end of the tunnel and a large monetary reward in the end. If you follow the company, you can observe they are slowly understanding this as stock-based compensation is decreasing each quarter, they are not investing in SPACs anymore, and they have always been fiscally responsible when it comes to low to zero debt and high cash on the balance sheet.

The temperament and expectation an investor should have with Palantir is to have extreme patience and follow the right metrics to ensure progress is continuing to your expectation. In my opinion these metrics are total number of customers acquired, contribution margin of the customer base, net revenue expansion, expansion of spend for top customers, continued decrease in stock-based compensation, and free cash flow.

If you do not have a long-time horizon and extreme patience, then, as CEO Dr. Karp has said many times, “Palantir may not be the stock for you.” This is also not a stock you just roll all your dice on but have in a diversified portfolio with weightings that match your risk tolerance. My risk tolerance is high, considering I am only 38 years old, have a long-time horizon, personal finances are in order, and I have earned high conviction in this company due to all the research I have done. If you would like to read more of my research on Palantir or other stocks you can find all my articles here.