Palantir Closes A New $90M Contract, But Is It Just Peanuts?
Palantir today announced that it has closed a $90M, 5-year contract with the Department of Health and Human Services.
From the press release,
This $90 million BPA will allow HHS officials across the department’s many agencies and missions to select the Palantir platform to support their work. Palantir’s built-in data protection features, innovative technology, and common security framework were deemed well positioned to address critical technology needs across HHS.
HHS established the SHARE BPA to provide the best value to the department and its partnering agencies through a pool of prequalified contractors to, among other things, improve the delivery success and quality of data driven insights and outcomes. This contracting vehicle marks the expansion of Palantir’s scope of work at HHS and is separate and distinct from Palantir’s work with HHS and its agencies on COVID-19-related health missions.
Is $90M Enough?
I made a video about this on my YouTube channel and I saw some comments indicating that $90M just isn't enough. At first, I was a bit confused because...well...$90M is a lot of money.
But then I tried digging deeper into the logic of the people commenting that this contract was, in their words, "peanuts."
The argument presented was that Palantir is a company with a market cap of around $25B. As a result, they should be closing deals that are in the hundreds of millions in order for it to have any direct impact on their business. Additionally, these same people argued that because the contract is over 5 years, it is not actually a good deal since Palantir will only be taking in around $18M per year.
So, after reading these comments I tried to have an open mind and understand the other side. The argument presented was that this contract won't have an impact on the stock, it won't move the needle, and it won't really do much for Palantir's bottom line.
Palantir Is Not A Business To Judge In This Way
Palantir is a juggernaut in the making. The thing about most juggernauts is that people usually don't see them coming, especially because of how complex they are to understand.
Palantir's entire thesis, as stated by management, has been to evaluate the stock on a long term basis. This is why when rock stars on Wall Street argue for a 5-year time horizon for certain stocks and then sell out of them within months, it's hard to trust their recommendations. Yes, you know who.
If you are investing in Palantir, you are investing in the idea that this company can actually change the world with their software products. I understand the stock price has been beaten up heavily and that we intuitively think $90M deals should be great news to the market, but the reality is that with interest rates rising and inflation not yet slowing down, most high-growth stocks will still have valuations compressed, no matter how many deals they report.
The bet on Palantir is that they are setting up a foundation for their company to truly change the world over the next decade. How do you set up a foundation?
Partnerships & Platforms.
Palantir partnered with the NHS back in April 2020 to try to help them resolve the massive data problem that was pandemic vaccine distributions. They were effective, landed a $34M 2-year deal, and now are currently in the running to land a $313M deal to revamp the entire NHS's data infrastructure.
Palantir partnered with Hyundai Heavy Industries in January 2021 for a report $25M deal. Critics again said $25M is nothing. If one were to dive deep into this deal, they would see that Palantir partnered with one of the largest ship building companies on the planet to build a "skywise" like platform for distributors and suppliers of ship parts in South Korea.
$25M may not be a lot today, but being the industry standard data software across hundreds of suppliers in South Korea will be worth a lot in the future. Ignoring the deals without looking into what is actually being done would be like analyzing this company with just an MBA.
Don't just have an MBA.
Additionally, Palantir is going to be increasing their NDR (net-dollar-retention) by being able to generate more revenue from existing government clients like the HHS, as they previously worked with them during the pandemic.
If the HHS used Palantir for the pandemic and decided their software and analytics capabilities was that good to give them $90M for the next 5 years, do we really see them not continuing to use them years into the future?
$90M today is a foundation to generate much more in the future, and if Palantir can lock their operating system into the backbone of companies and governmental agencies today - the potential for them to expand and build out more services, upsell more products, and ultimately generate more revenue in the future is what is exciting.
Critics can argue that $90M is nothing, but the truth is that Palantir has a massively sticky product that is penetrating new markets and getting out more dollars from existing clients because they see the value and they are willing to pay $18M a year to continue to get that value.
From the press release,
Palantir’s first task order obtained under the contract vehicle’s framework is a 10.5-month, multi-million dollar contract to support HHS’s core administrative data and applications through a vertically integrated platform that allows teams to configure low to no code applications to manage, ingest, and access data securely, across business domains.
“We are grateful for our continued partnership with HHS and the confidence in our software it is showing by selecting Palantir for a long-term, wide-ranging BPA,” said Akash Jain, president of Palantir USG. “We are proud to provide the software backbone to some of the country’s most critical public health missions.”
Overall, I think this is a strong deal for Palantir to get done and see more deals coming as a result of their ability to convince governmental agencies that their software is valuable.
BTW, I wouldn't mind $90M. Even if I was worth $25B.