The Capital Note

Palantir’s Eye-Popping Rally

A banner featuring the logo of Palantir Technologies at the New York Stock Exchange in Manhattan on the day of their initial public offering, September 30, 2020. (Andrew Kelly/Reuters)

Welcome to the Capital Note, a newsletter about business, finance and economics. On the menu today: Palantir shares skyrocket, a giant of labor economics passes away, Slack in acquisition talks with Salesforce, and Yellen’s plans for Treasury-Fed cooperation.

The Palantir Bump: Politics or Product?

Palantir, the data-analytics firm co-founded by Peter Thiel, went public in early October at a $21 billion valuation. The company’s shares, initially priced at $10, dipped on the day of its direct listing and were flat in the weeks thereafter. Analysts doubted that Palantir could grow quickly enough to paper over the hundred of millions in losses incurred in recent years.

The stock has nearly tripled since then — up 20 percent today alone.

What explains the $50 billion valuation for a company that reported more than $1 billion in losses this year? Some are chalking it up to the election of Joe Biden, whose personnel decisions suggest a return to a more muscular U.S. defense policy. The material effect of policy decisions on Palantir’s bottom line is hard to quantify. On the margin, a more active foreign policy expands Palantir’s potential revenue from government contracts, but not nearly enough to account for the $30 billion that has been added to the company’s market cap in the past month. Palantir’s market cap dwarfs those of competitors in government IT, such as Booz Allen Hamilton and Leidos; even if investors expect it to become the dominant contractor, that alone cannot justify the $50 billion valuation.

Not to mention that Palantir is disrupting the national-security establishment by competing with defense contractors that have entrenched relationships in Washington. We’re talking about a company that sued the U.S. Army in 2016 and won — not exactly a friend of the defense establishment. A return to the pre-Trump status quo should benefit defense majors such as Boeing and Lockheed Martin, not a young software firm. There’s also the inconvenient fact that the company’s co-founders both supported Donald Trump, and Thiel has been a vocal critic of foreign intervention.

As always, the real story of Palantir’s surge is less intriguing than the media narrative: It’s a very promising business.

Palantir reported higher-than-expected revenues in the fourth quarter, driven by a large contract with the U.S. Army and 15 sizeable deals struck with commercial customers. Revenue from new customers grew 177 percent from last year, diversifying Palantir’s customer base, which previously depended on a handful of big-ticket clients.

For a company like Palantir, the addition of a new customer returns a high multiple to the actual revenue generated by that customer because (1) new deals prove new use cases and (2) Palantir’s operating-system business model generates high returns to scale.

The foundation of Palantir’s commercial business model is its “Foundry” operating system, a central repository where customers can access, manage, and analyze their data. A large portion of the company’s recent growth resulted from the “modularization” of Foundry; i.e., Palantir began to sell bits and pieces of the platform rather than requiring customers to integrate it entirely. That’s crucial because the dominance of legacy data systems such as Oracle and SQL led investors to question whether Foundry would find a receptive market. Each new Foundry customer provides further evidence that there is a real market for new data-management tools.

And new commercial contracts improve the underlying product: As more businesses adopt the Foundry OS, more apps will be built on top of it, and the cost of switching to a different software provider will be higher. As the Foundry user base grows, so does Palantir’s ability to improve the operating system and identify additional use cases for it. Investors in the company are betting that Foundry will be adopted by a sufficiently large number of businesses to become a standard system for data analytics.

As usual with high-growth tech firms, this is a risky proposition: If Palantir achieves massive commercial adoption, it can take market share from standard data platforms and build high-margin products on top of its operating system. That can generate more growth in the form of consulting projects, new products, etc. If the company doesn’t take enough commercial market share, it will still be a niche, high-value IT firm, but it will not trade at 30 times revenue.

Bottom line: It’s not politics, it’s the product.

Around the Web

Palantir shareholders aren’t having all the fun: Slack gained nearly 40 percent today after the Wall Street Journal reported that Salesforce is interested in buying the instant-messaging company:

The companies could reach a deal within days—possibly by the time Salesforce reports its third-quarter financial results Tuesday, some of the people said. Slack, with a market value of more than $17 billion as of Wednesday morning, would be Salesforce’s largest acquisition ever. There is no guarantee the companies will reach an agreement.

Economists have long argued that only an independent central bank can conduct effective monetary policy. Otherwise, political pressures will lead central bankers to boost growth with excessive money printing and ultimately devalue their currency. Bloomberg reports today that “Yellen May Boost Treasury-Fed Cooperation.” While this cooperation seems limited to Treasury-backed lending programs, we hope it doesn’t become a new norm.

Earlier this week, National Review’s Ramesh Ponnuru evaluated Trump’s economic record for Bloomberg Opinion.

Edward P. Lazear, R.I.P.

Economist Ed Lazear died of pancreatic cancer this week at the age of 72.

A professor at Stanford University and chairman of the Council of Economic Advisors, Lazear transformed the field of labor economics by applying microeconomic methods to human-resource management within firms. The result was “personnel economics,” a sub-discipline founded by Lazear that studied the optimization of labor productivity through efficient employment contracts, compensation structures, and other HR tools.

Outside of the academy, he was a dedicated public servant. At the helm of the CEA during the 2008 financial crisis, Lazear was a key architect of the Economic Stimulus Act of 2008. Throughout his life, Lazear was among the most devoted and convincing proponents of free markets both in academia and in the popular press. We were honored to count him as an early contributor to National Review’s Capital Matters.

A portion of his eulogy, via Stanford News:

Recognized as the founder of the field of personnel economics, Lazear’s boundless energy and entrepreneurial spirit have led to contributions in many domains. At Stanford University, he served as the Morris Arnold and Nona Jean Cox Senior Fellow at the Hoover Institution, the Davies Family Professor of Economics at Stanford Graduate School of Business and senior fellow at the Stanford Institute for Economic Policy Research.

“Ed was a pioneering labor economist, a gifted teacher, an accomplished public servant and an extraordinary colleague,” said Condoleezza Rice, director of the Hoover Institution.

“Eddie brought a love of economics to generations of students and colleagues,” said Jon Levin, Philip H. Knight Professor and Dean of Stanford GSB. “His classes invariably were oversubscribed, and Stanford GSB students recognized him with both the MBA and PhD teaching awards. His infectious enthusiasm for ideas made him an all-time great seminar participant and an active convener of his colleagues. His colloquium (the ‘Eddie Lunch’) brought faculty together from across Stanford for two decades…”

Since 2017, Lazear has served as an adviser to the Federal Reserve Bank of Minneapolis. He was a frequent contributor to the Wall Street Journal and other news media. He was an avid traveler, bike rider and skier.

Lazear was born in 1948 and grew up in Los Altos, California. He graduated from UCLA and received his PhD in Economics from Harvard University. He taught at the University of Chicago for nearly 20 years before joining the Stanford faculty.

Lazear is survived by his wife, Victoria, his daughter, Julie Lazear, and son-in-law Dustin Dupuis.


— D.T.

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