$PLTR: Understanding its Immense Potential
Palantir could kick off the adoption of AI and Blockchain across industry, by enabling organizations to create digital twins that these technologies can be deployed on, completely changing the way companies function.
$PLTR on sale
Mr.Market is once again giving us a chance to jump on some very interesting companies at a growing discount. One of these companies, in which I currently do not have a position, is Palantir. Below follows my take on what the company does and why it may have a bright future ahead of it.
Palantir Creates Digital Twins
What Palantir actually does is allow you to create a digital twin / model of your organization. That means that it allows you to create a digital representation of any business process that you choose, that changes as the underlying reality evolves.
Basically, the AI we have today is like correlation functions but on steroids. It learns to associate things happening in the world with the most likely outcomes. For instance, it may learn that when some part of the supply chain slows down by 5%, but another part speeds up by 3% and then it starts to rain in a certain location, it would be best to delay the transportation of a specific batch of raw material by 10 minutes, because this would decrease costs.
As a deep learning algorithm (or rather, a set of them) begins to learn different correlations of this sort, by taking action based on what the algorithm recommends, one can come to a considerable optimization of goals. However, most companies operate in an analog environment today and AI algorithms operate in virtual environments. The only way to truly apply AI in your company is by creating a digital twin of it, that generates data continuously, that can be fed to deep learning algorithms, so they can learn and improve 24/7.
The same happens with blockchain technologies. Essentially, blockchain allows a company to automate any business process which involves a transaction / requires trust. For instance, consider all the business processes that require the approval of a notary -all those could be automated through the use of a highly trustworthy, secure and decentralized blockchain such as Ethereum. Further, smart contracts allow the counterparties of a deal to agree on terms, write up the agreement in code, push it to the blockchain and be totally certain that the deal will be executed as agreed. Again, none of this could happen in an analog space — you need a digital twin of the underlying business processes.
Humans at the Edges
The confluence of AI and blockchain in the same organization creates a new world for companies. It is no longer humans sitting at the middle of processes, doing tedious paper work and taking decisions based on gut feeling. Through Palantir, organizations now can be more like a system that you run through a dashboard, with a far higher degree of automation and efficiency than could ever be achieved in the analog space.
Further, the organization becomes a system that learns autonomously. It gets better and better as time goes by, as more data is generated, processed and used to optimize the calibration of deep learning algorithms. Meanwhile, humans operate on the edges of the organization, focusing on work that drives real value, that would be exceptionally difficult for machines to do, such as thinking outside of the box.
Ultimately, this translates into better business performance for organizations.
Its Key Asset
Around half of Palantir´s revenue comes from government clients — mostly, the US government. Recently, I read a book called “The Fifth Risk” by Michael Lewis that gives an insight into the very complex machine that the US government is and how it has been collecting vast amounts of data for more than 5 decades. Palantir has access to all of that data and this, I believe, is it´s key asset. Why? Because more and better data enables one to train better deep learning models, which later leads to an edge in the market.
This future won´t be here tomorrow, but it is already heading our way. I do not seem to find any direct competition for Palantir, but it is apparent that companies like Google, Amazon and IBM, for example, will be looking to enter this space.
Palantir is currently unprofitable, despite having existed for more than 17 years now. It must be noted, however, that enabling organizations to create digital twins is no easy feat and requires a large investment. Palantir has three customer phases: acquire, expand and scale — each one generating in FY2020 a revenue of 77mUSD (17% contribution margin), 360mUSD (47% contribution margin) and 613mUSD (70% contribution margin). The bull case wins if Palantir can get a lot of customers to the scale phase and keep them there, because it doesn´t seem like decreasing OPEX would be a good idea for them. The balance sheet is non-menacing, as I like to call it.
So, are we going to see in the future a lot of organizations running digital twins, with AI and blockchain technologies doing a lot of the boring work? I believe so. I also believe we are going to see a lot of companies deploying this technology in the next few years to make their supply chains more robust, transparent and accountable, after COVID19 has evidenced that supply chain disruptions are no fun.
Key Advancements Since I Last Looked at It
One thing I was not too sure about when I looked at this company about a year ago is how they were going to speed up sales. Their core product requires a relatively complex installation process in order for customers to start using it and this implies meaningful friction. Recently, however, the company has recently launched Foundry for Builders, which is essentially a productized version of their core offering, meaning it is way easier to distribute and that ultimately, it may help speed of sales. I have not managed to pick up any qualitative signals on how Foundry for Builders is doing, but I will be keeping an eye on it together with the share price, which technically speaking looks to be at a delicate point.
Stay tuned for the deep dive on $DNA!
Thanks for reading Investment Ideas by Antonio! Subscribe for free to receive new posts and support my work.
You can also reach me at:
This is good DD. So many people are writing articles on Palantir without understanding the companies fundamentals. But this author gets it.
Good write-up, thank you for sharing Antonio!