Palantir: unlocked and almost loaded

Peter Thiel, co-founder of Palantir. Palantir's direct listing meant it did not have to impose a limit on shares traded. Photo / Getty Images

Lex OPINION:

Lock-up expirations pose a threat to high-flying stocks. Palantir is an obvious candidate. The US$50 billion ($68.2b) US data analysis company is valued at about 34 times forecast sales, has yet to make a profit and appears unlikely to replicate last year's growth. Yet its shares rose when the lock-up period ended on Friday. That bodes well for the rest of the year.

Lock-ups are designed to ensure orderly trading in the wake of an initial public offering by preventing early investors, including employees and venture capital firms, from immediately cashing out. When lock-ups end it is reasonable to expect prices to dip. Twitter's share price fell 18 per cent when its lock-up expired. Uber's share price hit a record low at the end of its lock-up.

Palantir's direct listing meant it did not have to impose a limit on shares traded. Choosing to lock up all but 20 per cent of stock held by existing shareholders was a smart decision that reassured new investors.

The rise in its shares suggests investors expect Palantir to maintain the jump in operating margins and sales that the pandemic sparked. This is a proposition the company itself seems unsure of.

Once best known for secret government consultancy contracts, Palantir wants to be seen as a high-margin software company with important commercial clients. Fourth-quarter results cast doubt on that thesis. In 2020, government-related revenue rose 77 per cent while commercial deals with the likes of Rio Tinto and BP increased 22 per cent.

The sales boost may not last. Credit Suisse points out that the company expects 45 per cent sales growth in the first quarter of 2021, but full-year growth of more than 30 per cent. That suggests sales in the second half of the year may slow down as pandemic-related contracts come to an end.

Palantir has continued to win new clients in spite of criticism over its work with the US defence establishment. Like many tech listings, stock-based compensation is high but should fall over time. Remove it and Palantir could have reported an operating profit of almost US$100 million in the last quarter.

Palantir reported a 41 per cent increase in revenue per customer for the year. This implies the business is selling more services to satisfied customers. That bullish signal should outweigh any post-pandemic sales slowdown — or the impact of stock sales. Palantir's hopes of becoming a scalable software business are worth backing.

Lex is a premium daily commentary service from the Financial Times.

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