Data-mining company Palantir Technologies, Inc. (NYSE: PLTR) went public on the New York Stock Exchange on Wednesday, September 30, 2020. Asana also went public on the same day, putting both on the shortlist of just four companies to IPO using the new direct-listing method.
High on the list of benefits of using this method is avoiding the large fees charged by an investment bank to take a company public.
IPO Day Issues
However, Palantir had technical problems on its first day of trading using software by Morgan Stanley. Company employees were unable to sell their stock, leading investors to wonder how many more sellers may want to sell their shares, which may drive down prices.
Palantir’s stock opened at $10 per share about 1:40 pm Eastern time but wasn’t fully functioning until 3:30 pm ET, leaving just thirty minutes of trading before the Close.
The company’s valuation at IPO was approximately $21 billion. The direct-listing method will not replace the traditional IPO market for one simple reason: it does not raise additional funds for the company. No additional shares are sold that happens in a traditional IPO process.
The fees raised by investment bankers are partly due to finding buyers for the newly available shares. Since Palantir is more interested in secrecy than raising additional funds, avoiding the disclosures related to a traditional public offering makes sense.
Palantir stock’s IPO price opened at $10 per share on September 30, 2020. The stock tested lows just a few days after going public, falling to $8.90. Since then, it has been treading water, moving sideways in a range of $9.20 to $9.90 in its first few weeks of trading. However, in the past week, Palantir has rallied above its $10 IPO price.
Palantir’s Government Contracts and Financial Losses
Palantir is not your typical technology startup. First, the company was established with CIA seed money. That’s interesting – I didn’t know the CIA was in the venture capital business…
The company has never been profitable in its 17-year history, despite $742 million in sales in 2019. Furthermore, its core clientele is departments of the U.S. government, including the CIA, FBI, NSA, and Dept. of Defense, to name a few.
Palantir came under fire for ethical reasons when it was learned one of its clients was U.S. immigration enforcement. Its software was used to help track and apprehend illegal aliens, bringing some people to protest the company and its executive team. Such protests are best directed toward the government that makes the policies and hires the company, rather than the company that provides a service to the government.
Whether to invest in Palantir is a difficult decision at best due to its hybrid nature. It is a part software company with a higher growth potential and part consulting company with lower margins. The company has changed its previous sole focus on government clients to its current ratio of about 50/50 sales to government and the private sector.
The company is growing fast. Sales in 2020 are expected to exceed $1 billion, approaching double sales in fiscal 2018. One analyst described the company as, “One of the best-positioned companies to succeed in creating a unified AI (artificial intelligence) and data analytics platform.” (see YouTube: “Palantir IPO – Everything you need to know”). Its AI software, which must be customized for each client, has many different uses. British Petroleum said using Palantir software, Foundry, helped to increase oil production in the North Sea by 10%.
Most software companies with fast revenue growth become profitable at some point as long as they can maintain that fast growth. After being in business for 17 years, Palantir has staying power. Despite the secrecy, with all its broad potential in and out of government, it looks like an excellent long-term investment.
Article By: Gregg Killpack