A prickly patriot: Palantir’s prospectus reveals losses, promise

If you read the S-1, you'll notice that Palantir's costs are front-loaded, and their revenues are back-loaded, on a per-deal basis. A given deal both costs them far more its first year, and generates far less revenue in its first year, than it does in any subsequent year. This is strikingly similar to SaaS economics. (Palantir is not a SaaS, but its cashflows and long-term margins look a lot like those of a SaaS.)

Government contracts take a long time to close, but once closed they generally stay closed and often expand. Defense, in particular, is the most enterprise-y of all enterprise clients. So it's reasonable for Palantir to outlay a large fixed cost (in the form of sales, consulting, and integration) in exchange for a perpetual, increasing annuity. Their quarterly losses are a result of them closing many new deals that are in the integration phase and haven't yet started to monetize fully. Notably, Palantir's per-deal long-term margins (70-90%) are closer to those of a SaaS than to those of a Big Four consultancy (~30%).

The "lose money now, make money later" playbook is common to all SaaS companies and works phenomenally well. Palantir's twist is that they do significant integration and custom work up front, at the expense of less sales staff. If you dig into their numbers, it's hard to argue they haven't made a strong case that this model works.

So while I understand the skepticism at their high-level metrics, the details paint a more optimistic picture than "low interest rates made this bad company viable" (an argument I've seen elsewhere). No IPO investor wants to subsidize losses indefinitely, after all.

This is a result of low interest rates in the last 20 years. There is an insane amount of institutional money looking for a home, and it is also impossible to get decent yields with money right now. Therefore any businesses with potential to become huge, will be happily funded for a very long time.

This is only going to get worse due to the insane stimulus due to the coronavirus.

It is almost as if money now has so little value that losing as little of it as possible is what investors are looking for, aka negative interest rates by another name.

I wouldn’t blame the companies for this, this is a result of governments not willing to allow recessions in the early 00s, then in 08, and now. But it has serious long term effects which are hard to understand as it’s so complex.

Actually they are cash break-even, the loss they report is due to GAAP-rules not allowing you to recognize cash on your balance sheet as revenue until you delivered the service.

For the next 12 months they are sitting on 280.2 mil customer deposits that will become irrevocably delivered (and turned into revenue) and 215.4 mil revenue that is collected but not recognized.

For more then 12 months they have 74.3 million in deposits and 118.6 mil deferred revenue collectes.

Given the stickiness of the client and the product I think you can assume this cash will turn into revenue and then the picture looks quite different with an operating loss of 576 mil and 688 mil of non-recognized revenue, they are generating 112 million in excess cash.

That's probably also the reason they are not raising additional cash in the IPO. Their customers are funding the company completely now.

Large companies usually make or lose more money than most individuals deal with.

It's not uncommon for a company that could have been profitable to instead choose to invest in getting even bigger reach, and potentially getting an even bigger profit down the road - and VCs tend to press hard for this course. For some (many even) it's unsustainable and kills off what would otherwise have been a nice million dollar company in an attempt to turn it into a billion dollar company. But for some it works out, and the investments do really pay off - and they do so massively. So long story short, it's quite possible for a company to run at a loss for years, but be able to turn a profit at any time, if they just ease their foot off the pedal. Others really are burning through more money than they'll ever know how to recoup. But you really need to dig into the details to tell the difference.

I think a lot of economics is neither rational or irrational. Emergent systems tend to be like this, and it contradicts a lot of our intuition about how systems should be.

I think we should look at the stock market as part of the monetary system. In some sense, this is at the heart of "capitalism." Capitalism has become a very complex term after 200 years of complex use, but in most versions it's dated to the Dutch and British empires' systems of chartered companies, tradeable bonds, and stocks.

Bubbles occurred from the very start, which basically means unsustainably irrational. But (imo) it's a mistake to assume that anything short of a bubble is/was rational. The textbook (rational) definitions of "value" are only determinable in retrospect. But, this is pretty theoretical.

It's quite rare that a traded company justifies its value in dividends, regardless of profit. This is why the total market cap keeps growing.

Big name SV companies not making profits?

Shocked! I am shocked I tell you!

> This is a baffling form of might-be capitalism

This is just plain old capitalism. They were speculating on hollow companies and selling snake oil long before 1929.