On Palantir, and being mad

Last week, shares of Palantir gained more than $5 billion in market cap after the company announced a $178 million multiyear contract.

We’ll get into the particulars of the contract and whether the enthusiasm was justified in a minute. But we shouldn’t rush past that amazing price move: Efficient market enthusiasts would tell you that the market believes Palantir’s total value jumped more than 7%, or billions of dollars, based on a $178 million deal. (Cue the letters from the efficient market folks!)

For comparison’s sake, Lockheed Martin announced a $219 million contract on the same day and its stock was down slightly. (Yes, at this point I am just trolling nonsensically.)

The move is amazing! Notable! And I did indeed note it publicly. And before we get to the merits of the deal and the move, I need to comment on a response I received while marveling. (Names omitted to protect the… I don’t even know anymore.) The response:

I need to say the following as loud as possible.

🚨🚨🚨🚨THIS THINKING IS A GOOD WAY TO LOSE MONEY  🚨🚨🚨🚨

I say that regardless of who ends up being right on Palantir. It is much broader than Palantir. And its underlying cause is one of the biggest mistakes investors can make when buying and selling individual stocks.

Investing is not sports. It isn’t board games. You can learn a lot about how to invest from observing board games and sports. But they are fundamentally different things. The tribalism we bring over from sports and other activities and apply to markets will end up bankrupting us.

Analysts have a lousy job. I don’t think they are all that useful to investors like me. But, bar rare exceptions, analysts are crunching the numbers, looking at trends, and coming to conclusions you may or may not agree with. They are not taking sides. They don’t care if you make money or lose money. They are not out to get you or the band of brothers you have formed to celebrate the greatness of a particular stock. They don’t care you have created a cute name for yourself taking the name of the company and adding -arians at the end.

The RBC analyst isn’t “mad” because a $178 million contract has sent Palantir’s stock shooting higher. The RBC analyst is questioning that move based on the same data analysis and market analysis that led the analyst to place a low price target on the stock in the first place.

Or said another way, the analyst simply disagrees with current market sentiment. They could be right; they could be wrong. But it helps you not to be dismissive about it, to assume you must be right and they must simply be overly emotional.

Just as the referee almost never makes a call because he/she hates your team, the analyst is not just making stuff up because he/she hates your company. Believing otherwise is falling in love with a stock. It is a pathway to ruin. Stick with the objective or stick with mutual funds.

About that Palantir deal…

I’m on the record as being skeptical about Palantir’s valuation. But I do understand the excitement here. It is pretty rare for the Pentagon to make a software company the prime contractor on a hardware platform. We don’t know how much of this is the start of a trend and how much of this reflects merger scarred RTX’s inability to mount a credible challenge, but Palantir was deemed worthy of choosing by the Army and it does, in theory, mark a change in attitude inside the Pentagon and offer the potential for more such deals on the horizon.

It is hard to argue that it is anything other than fantastic news for Palantir.

That said, it is just $178 million over two years for 10 prototype vehicles. Palantir is just a software company, and a lot of that money will go to partners like Northrop Grumman and L3Harris to actually build the trucks and wire them and do all of that actual platform creation. For a company with more than $2 billion in annual revenue there is no way this moves the needle. Period.

If all goes well the Army is going to buy a lot more than the 10 prototypes. Palantir sees a total market of 100 to 150 TITAN trucks. That will be a separate negotiation, and the Pentagon will argue (as always) that a batch of 100-plus after the R&D is done should cost a lot less on a per unit basis than an initial batch of 10 prototypes. And as a taxpayer I assume the Pentagon will win that argument, as it usually does.

But even assuming a full 150-unit order at the same per unit price as this deal, we are talking $2.7 billion in revenue spread out over close to a decade and divided among a lot of players. It is what it is. An incremental positive similar to what all defense contractors deal with on a daily basis.

Second point: Every government procurement is different. Every one of them has its own particulars. That’s not to say that this contract doesn’t mark the beginning of a new era in government contracting. I’ve been saying for years the value is increasingly moving towards the brains of a platform (the electronics and software), and away from the metal-benders. That is bullish for the likes of Palantir.

But it is almost always wrong to read too much into one particular award and extrapolate it to others.

Finally, the irony of this massive reaction to a government contract is that Palantir megabulls had better hope this doesn’t turn into a government contracting story. This echos my original commentary on this company, but it can’t be stated enough. When Palantir went public the dream was 40% compound annualized revenue growth. They’ve since backed away from that, but the most frothy bull cases still talk about years of 30% growth.

That’s just not how government contracting works. You can’t grow that fast, and with the sort of software margins people dream about, if your focus is on the government. That’s why good, solid, growing government contractors like Booz Allen Hamilton trade at two times sales, adjusted for debt.

The only way for those dreams come true is via a surge in commercial interest. Palantir trades at 24 times sales. That’s a premium to even commercial companies like Snowflake (17x), but at least within the universe for commercial. Even in the best-case is correct here with regards to the $178 million Army contract and what it means for Palantir’s future as a government contractor, you are still at best just creating a run-of-the-mill government contractor.

I believe two things about Palantir. The company has an attractive business with real growth potential. Separately, its stock remains insanely overvalued and with volatility that defies logic.

I may end up being wrong here. But dismiss me as just mad or emotional at your own peril.

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