Afternoon Markets: It’s like Morning Markets but arrives after lunch.
Late last week Reuters reported that Palantir, the pseudo-secretive intelligence unicorn that has been in the news for political reasons, is looking to raise a raft of new capital. Per the report, Palantir is looking to raise as much as $3 billion (and as little as $1 billion) at a valuation that could land “between $26 billion and $30 billion. ”
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If this all sounds familiar, it should. Late-stage Palantir has been in IPO limbo for as long as I can remember. That it needs to raise more capital, therefore, isn’t a surprise. Its targeted valuation, in contrast, feels like one.
Let’s remind ourselves of what we know and try to work out how much more sense Palantir makes at $30 billion today than it did last year at its old, floated $41 billion IPO valuation. That IPO is on hold.
In October of 2018, Palantir was expected to bring in around $750 million in revenue for the year, up from “roughly $600 million” in 2017 according to the Wall Street Journal. That pace of growth, 25 percent, was light for a company supposedly targeting a public valuation of over $40 billion at its then-extant revenue scale.
Later, news broke that the firm’s year was going better than expected. Indeed, in early January of this year figures as high as $1 billion were being reported for the company’s 2018 revenues. Growth from $600 million to $1 billion ($1,000 million) in a year works out to 66 percent. That’s a far better figure for a company looking to nail down a valuation increase. (Palantir was worth just over $20 billion during its 2015 funding event.)
Later in Q1, however, reports got more specific, pegging Palantir’s 2018 revenue at $880 million.
With the new, reported figure, we can calculate that Palantir grew about 47 percent last year in revenue terms. That’s not bad for a company as old as the unicorn is (Palantir was born in 2004, according to Crunchbase). But is that rate of expansion sufficient for a firm looking to target such a large, new valuation?
Perhaps. But as we’re considering its 2019 valuation, the firm will raise off its current-year results instead of what it got done last year. So, we’ll need numbers for this year.
For the sake of argument, let’s presume that Palantir’s growth rate does not slow this year. (This will set up a bullish case, something we’ll remind ourselves of at the end.) If the firm grows as much in 2019 as it did in 2018, Palantir would wind up revenue of $1.29 billion through this December.
However, when stacked next to a $30 billion valuation — the high-end figure that the firm is targeting in its new funding round — the revenue result feels low, especially as we’re not sure what percent of the company’s revenues come from services instead of software. At a valuation of $30 billion, $1.29 billion in revenue arrives at a revenue multiple of 23.2.
(What portion of Palantir’s top line comes from services instead of software isn’t clear to anyone. The question is one that an HBS piece asked whether the firm is “product of services company,” somewhat humorously.)
The greater the percent of Palantir’s revenue that comes from services instead of software, the lower its revenue multiple should be per Jason Lemkin, a Yoda-esque figure in SaaS investing. As it is reasonable to presume that Palantir has more services revenue in its total top-line mix than the average SaaS company, we can estimate that it should trade at an anti-premium to other SaaS companies of similar scale, and growth.
Let’s continue by way of analogy. To understand if a trailing revenue multiple of over 23 is fair for Palantir, let’s compare it to a firm that we understand more clearly.
Recall that we’ve examined Slack lately in light of its repricing by the public market. Slack is an attractive company from a financial perspective, with high gross margins, recurring revenue, and well-known branding. It is growing faster than Palantir in percentage terms and has higher revenue quality (per our discussion of revenue mix).
Slack currently trades at a trailing price-sales ratio of about 26.
Recall that in our example Palantir’s end of year implied trailing revenue multiple that we came up to is close to that result (23), and is predicated on the idea that Palantir’s percent-rate-of-growth doesn’t slow this year (a heroically bullish idea). Given that we set Palantir’s revenue high in our thought experiment, we lowered its revenue multiple at the same time. That our over-optimistic revenue guess puts Palantir’s multiple near Slack’s own, then, makes a $30 billion Palantir valuation seem quite high.
Slack also has a clearer revenue mix (using its gross margins as working proxy), faster growth in percentage terms, and a known loss profile. This makes the two having similar multiples all the odder.
Which brings us back to where we started, really. I don’t know how to value Palantir intelligently as the firm is private and doesn’t share its revenue mix. But working around the edges, the prices it hopes to command do feel high.
When Big Secret raises we’ll run the numbers one more time. For now, it’s fascinating to watch a firm pull back from an IPO while working to add so many billions to its private-market valuation.
Illustration: Li-Anne Dias.