By Chris Bryant
Palantir Technologies Inc.’s raison d’etre is identifying patterns hidden within mountains of data. Yet somehow it didn’t spot the risks in its own investment strategy or the danger that startups might not be able to pay their bills.
Palantir’s losses from a portfolio of businesses that went public via special purpose acquisition companies, show the dangers of correlated stock investments and an unsustainable growth strategy.
___STEADY_PAYWALL___Co-founded by outspoken entrepreneur Peter Thiel and known for its work with the intelligence community and the UK’s National Health Service, Palantir has spent $450 million since 2021 acquiring shares in about two dozen early-stage companies, nearly all ex-SPACs. The quid pro quo: The startups promised to purchase Palantir software and services, typically of a value that was equal or greater than its investment.
Realized and unrealized losses on the SPAC portfolio reached 75% at the end of September, or about $333 million, according to my analysis of Palantir’s latest accounts. The red ink may have increased since then. Because many of these startups now face a cash squeeze, Palantir may also be overestimating how much revenue it will receive from them.
The SPAC misadventure features in several class action lawsuits by investors that the company intends to defend “vigorously,” according to its third-quarter accounts. Palantir declined to comment.
Though backing a bunch of SPACs seems hubristic in hindsight, it’s the kind of thing that happens when the stock market is awash in liquidity and rewards growth above profits.
The Denver-based data crunching company went public in 2020 via a direct listing. By contributing money to the private investment in public equity (PIPE) deals that typically backstop SPAC transactions, it was able to quickly expand the commercial side of its business, reducing its reliance on state contracts. Government clients account for around 55% of sales.
The startup portfolio contributed around 6% of sales in the latest quarter, but even this modest amount of additional revenue had the potential to add billions of dollars to Palantir’s market capitalization: At the peak in 2021, Palantir was valued at $68 billion, or around 35 times sales.
In return Palantir’s “day zero” SPAC partners got some much needed capital, software to help them scale quickly and the chance to boast about working with a revered, secretive tech company.
Citigroup Inc. analyst Tyler Radke warned last year the SPAC transactions created “questionable incentives” and bore a similarity to the non-arms-length deals that fueled the dotcom boom and bust. Such worries turned out to be prescient. Palantir’s stock has crashed more than 80% from the high as its revenue growth slowed and the SPAC investments plummeted.
Palantir announced the winding down of the SPAC investment program in May and three months later said it had “voluntarily terminated” several contracts related to these investment commitments.
The company has also reduced its remaining financial exposure by selling some of these securities, including the bulk of a $40 million bet on flying taxi company Lilium NV. In total, it held startup stocks worth just $57 million at the end of September.
Palantir has offset some of its losses with around $150 million of revenue generated so far from its investees, which equates to about $115 million of gross profit. The company expects the SPAC portfolio to generate a further $755 million of revenue in coming years (around $30 million a quarter), an estimate Palantir says takes into account “the customer’s ability and intention to pay.”
Nevertheless, I think the projection could prove overly optimistic. You needn’t take my word for it. “We continue to believe a large portion of deal value from SPAC customers is at-risk, especially in a worsening macro environment,” Rishi Jaluria at RBC Capital Markets told clients last week. “Many of Palantir’s SPAC customers are under financial pressure with limited cash runway.”
Several of the startups it backed generate little or no revenue and around half (!) have this year expressed doubts about their ability to remain a going concern.
Such warnings don’t mean a company will go bust, and some have recently raised more capital. But it’s not an encouraging picture: Revenue collection could be impacted if these customers “are unable to generate sufficient revenues or profitability or to access any necessary financing or funding in a timely manner,” Palantir’s annual report acknowledges.
One SPAC partner, custom-parts manufacturer Fast Radius, filed for bankruptcy this month just months after going public. Hence Palantir is unlikely to receive the bulk of the $45 million revenue anticipated from that contract and its $20 million investment is probably worth zero.
But it already got at least some of the money back: Fast Radius immediately paid $9 million to Palantir when the SPAC transaction closed in February, according to a financial filing. The bankruptcy filing says Palantir is owed $3 million.
Still, for a company whose chief executive Alex Karp proudly concedes he’s seen in some quarters as “batsh*t crazy,” Palantir’s finances are in otherwise good shape. The company has $2.4 billion of cash and no debt (besides leases). It also owns $50.9 million of 100-ounce gold bars which it purchased in 2021 as a hedge against a possible “black swan event”, a fancy way of saying the apocalypse. What a pity Palantir didn’t exercise the same caution in the SPAC market.
Read also:
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- BizNews Share Portfolio November update: Tech capitulation must be nigh
- Newly restructured BizNews Share Portfolio is off to a cracking start in October
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