Sorry Haters, The Naysayers Are Right About Palantir

Palantir Technologies (NASDAQ:PLTR) stock is quirky. So is the Denver-based software company.

Investors who march to the beat of their drummer, the type of people who create their fashion trends much to the horror of their friends and family, might be tempted to buy PLTR stock to prove the naysayers wrong.

Boring people, such as yours truly, who like to invest in profitable companies in growing markets, probably will avoid PLTR stock. However, there is a wild card in the PLTR equation that people should consider to push some folks off the sidelines by Oracle (NASDAQ:ORCL).

I will tie Larry Ellison’s company to PLTR at the bottom of this post. Spoiler alert: It’s not a happy ending.

The Method To My Madness

First off, PLTR prides itself on being a different sort of software company. The company moved from Silicon Valley to Denver because it didn’t share the rest of the industry’s values. PLTR specializes in providing software for governments and businesses used for crunching large amounts of data. Government intelligence agencies use PLTR shares, which has turned off some investors, including billionaire George Soros. The company also is noted for its secrecy.

Here’s what Chief Executive Alex Carp wrote in a letter included in the company’s prospectus:

Software projects with our nation’s defense and intelligence agencies, whose missions are to keep us safe, have become controversial, while companies built on advertising dollars are commonplace. For many consumer internet companies, our thoughts and inclinations, behaviors and browsing habits, are the product for sale. The slogans and marketing of many of the Valley’s largest technology firms attempt to obscure this simple fact.

Deep In The Red

PLTR also hasn’t made a nickel in profit since it was founded in 2003 and isn’t in any rush to find a path to profitability. The company also is spending lots of money during the worst health crisis in more than a century. According to an SEC filing, general and administrative expenses soared more than 20% to $164 million in the nine months ending on Sept. 30.

Staff levels are also on the rise. It had 313 employees at the end of 2010. A decade later, PLTR had more than 3,400 workers.

Shares of the Denver-based software company have surged more than 160% since the company took the unusual step of directly listing PLTR stock on the New York Stock Exchange in September through a little-known process called a direct listing. Unlike an initial public offering (IPO), direct listings sell existing shares instead of generating new shares. Direct listings, also known as direct placements or direct public offerings, have their pluses for companies. 

A Unique Debut

For one thing, they are a cheaper alternative than IPOs, which investment bankers charge millions to oversee. A 2020 analysis of 705 companies by PricewaterhouseCoopers found that underwriting fees, the largest direct costs of a new stock sale, average between 3.5% and 7% of gross IPO proceeds.

According to a software company of PLTR’s size, which analysts expect to generate more than $1 billion in 2020 revenue, would have to shell out between $45.5 million and $127.6 million to sell new shares to the public.

Following the debut of PLTR stock, the company’s five founders – billionaire tech investor Peter Thiel, CEO Alexander Carp, Joe Lonsdale, Nathan Gettings and computer scientist Stephen Cohen – gained 49.999% control. They transferred 335,000 shares of their Class B common stock for the same hares have a variable number of votes and is convertible at any time for one Class B share. 

Dual-class ownership structures are always a red flag for investors. The Council of Institutional Investors urged PLTR to adopt a sunset provision for its dual-class design for seven years or less. The non-profit argued in a letter to the company that studies have found that companies with a one-share/one-vote system perform better over the long run.

To underscore its point, the CII placed PLTR on its dual class enablers list that encourages investors to vote against company board members with two or more stocks classes.

Where’s The Value?

PLTR stock doesn’t make any sense to me. The shares are trading at more than $10 above their average 52-week price target. Maybe Palantir would make sense after a pullback in price, but I would have misgivings about buying a company that cared so little for shareholders even then.

A few years ago, Oracle CEO Larry Ellison reportedly was interested in buying PLTR. A deal probably still makes sense since both companies are in the database business. However, mergers that are supposed to happen often never occur. That’s why PLTR stock isn’t worth the trouble.