On September 30th, 2020, one of the year’s largest tech IPOs took place when Palantir (PLTR), one of Silicon Valley’s most controversial companies, went public with an initial market cap of $16.5 billion at $10/share. The 17-year-old company now trades at $10.13/share a month later. Despite being in business for so long and making $742 million in revenue in 2019, Palantir is not profitable, losing over $600 million in 2018 and 2019, and remaining poised for yet another significant loss in 2020. Palantir has essentially remained operational through multi-billion dollar private financing rounds and through its government contracts. But this disparity between apparent success and a lack of profitability only scrapes the surface of what makes Palantir so widely discussed.
Palantir, known today as “Silicon Valley’s secretive tech company”, was founded in 2003 by VC and co-founder of PayPal, Peter Thiel, along with Joe Lonsdale, Stephen Cohen, Nathan Gettings, and Alex Karp, the company’s CEO. The company’s name comes from the “palantíri”: magical orbs from J.R.R. Tolkien’s Lord of the Rings Trilogy that allow their users to see anything happening in the world in that given moment - the ultimate fictional surveillance tools. This name fits as Palantir’s main function is creating software that can collect and analyze large and disparate data sets, putting the data all in one place to discover new connections between the data. The company got its big break by pitching itself as the company that could have prevented the 9/11 tragedy of 2001. Indeed, in 2011, Bloomberg Businessweek wrote, “Palantir technology essentially solves the Sept. 11 intelligence problem.”
Since Palantir’s creation in 2003, the company grew to a $20 billion valuation in 2015 despite never being profitable (a notably higher valuation than their current market cap by a few billion dollars). Palantir is poised to surpass $1 billion in annual revenue by the end of 2020. The company also notably went public through a direct public listing. The company has several high-profile customers, including U.S. Immigration and Customs Enforcement (ICE), the National Security Agency (NSA), the Central Intelligence Agency (CIA), several governments of foreign US allies, and a host of large private companies including Airbus, BP, and Ferrari. Palantir’s software offerings vary greatly between individual customers, with government agencies using the software for anti-terrorism and anti-crime purposes and private companies using Palantir’s software to centralize and secure their data. Private companies contribute about 50% of Palantir’s annual revenue, but Palantir’s dealings with governments and agencies is what gives it much (though not all) of its controversy. The remainder of this article will explore the controversies surrounding Palantir first through the eyes of the general population and then an investor’s lens and lastly from the perspective of Palantir itself.
Why is Palantir so controversial?
Aside from general concerns surrounding data privacy in America, Palantir has amassed a huge collection of criticisms by the public. Palantir’s main criticism is its willingness to work with ICE. While Palantir denies that its software is used by ICE for deportation purposes, a few internal ICE reports have referred to Palantir’s technology as “key” to many of its operations; these operations include the targeting and arresting of families crossing the US-Mexico border. ICE itself has faced many accusations of medical neglect and physical and sexual abuse of detained illegal immigrants, as well as separating children from parents at the border. The conflicting claims on how Palantir’s software is used by ICE and the sheer brutality of the accounts against ICE are by far the greatest sources of the negative PR the company receives. Amnesty International said of Palantir that it is, "failing to conduct human rights due diligence around its contracts with ICE" and that, "there is a high risk it is contributing to human rights violations." However, Palantir’s dealings with ICE is by no means the only source of its controversy.
The scale of data that Palantir collects and may have access to is alarming to many, as well as the ways that powerful end-users may use that data. Remember several years ago when there was immense public concern about the NSA surveilling US citizens as a ‘counter-terrorism’ measure? Palantir’s software was perhaps one of the biggest enablers of NSA surveillance of both legitimate terrorist threats and everyday US citizens. As such, much of the discussion surrounding ‘Big Brother’ today pertains to fear of Palantir software’s capabilities and the power it gives non-elected officials in organizations like the NSA and the CIA.
Concerns have also been raised about Palantir itself having access to comprehensive classified data and the implications of this on privacy. In 2014, an incident occurred that illustrates the merit of this unease. A start-up called Cambridge Analytica sought to obtain tens of millions of Americans’ Facebook data to build psychometric profiles of American voters that could be sold to political campaigns. Cambridge Analytica was successful, and this data, though wrongly obtained, was allegedly used to help Donald Trump’s election campaign in 2016, along with the campaigns of several other political candidates. Palantir became involved in this scandal in two key ways. Firstly, Cambridge Analytica was advised by a Palantir employee named Alfredas Chmieliauskas, who worked in business development at Palantir. Palantir initially stated that they, “never had a relationship with Cambridge Analytica, nor have we ever worked on any Cambridge Analytica data.” They later revised their statement to say, “Mr. Chmieliauskas was not acting on the company’s behalf when he advised Mr. Wylie on the Facebook data.” Secondly, it is worth noting that Palantir co-founder Peter Thiel is a board member at Facebook, with a few other senior executives at Palantir also having ties to Facebook. While Palantir’s role in this scandal has not been officially defined, it lays to bear the, what many might call, questionable integrity of Palantir’s management and the problematic ties that the company’s management has to large sources of abusable data such as Facebook (not to mention, much of the data the US federal government collects).
What controversy does Palantir ignite within the investor community?
As stated earlier, Palantir has never been profitable. However, Palantir has always had investors clamoring to invest in it - a phenomenon questioned by many of today’s financial analysts. Some argue that Palantir would never have existed without the federal government’s financial support from the very beginning, as the CIA was one of Palantir’s earliest investors through its venture arm, In-Q-Tel. The CIA was also Palantir’s only customer for several years as the company developed its technology, according to Forbes. This is by any standard, an unconventional start, as most companies do not have the option of having their investors double as customers large enough to keep the company afloat for years.
Among Palantir’s other early investors are Silicon Valley VCs, whom Palantir has decisively distanced themselves from, headquartering themselves in Colorado. To further this point, Palantir’s CEO Alex Karp, cast aspersions on Silicon Valley in the company’s prospectus: “Software projects with our nation’s defense and intelligence agencies, whose missions are to keep us safe, have become controversial, while companies built on advertising dollars are commonplace.” Many believe that this comment was aimed at tech giant Facebook, despite co-founder Peter Thiel’s ties to the company.
Another significant risk to Palantir that causes apprehension amongst investors is its high customer concentration. Palantir said its top 20 customers accounted for 67% of its 2019 revenue, with its top three customers making up 28%. In addition, a single customer contributed 12% of its 2019 revenue. To lose any one of these customers could have a significant impact on the business’s financial future, especially considering that the company has already been operating at a net loss for its entire life. Additional regulatory action on data privacy may lead Palantir to be unable to provide the services some of its clients demand. Palantir has also stated itself that stricter privacy policies could at the very least, cause the business to, "incur substantial costs … in an effort to maintain compliance."
Needless to say, a significant risk to Palantir is the weight its bad reputation carries. Palantir has stated that because many of its clients “are perceived to be harmful”, activism against the company has ensued, potentially warding off new customers, investors, and employees. The company also states, “being perceived as yielding to activism targeted at certain customers could damage our relationships with certain customers … whose views may or may not be aligned with those of political and social activists.” Essentially, the company is caught between a rock and hard place, as addressing activism against controversial clients may lose them those clients, but refraining from acknowledging claims against some of their clients may prevent them from moving forward as a company with new clients, investors, and employees.
For a company who relies on a small few customers to persist, Palantir is also particularly selective about the customers it does take on, stating that it will not work with, “customers or governments whose positions or actions we consider inconsistent with our mission to support Western liberal democracy and its strategic allies.” While this strategy is probably necessary to maintain its Western customer base, it is worth noting that this policy can be limit revenue potential. This said, it is undoubtedly best for everyone involved if this company does not double-deal with the US and say, China or Russia.
Palantir has also gone public utilizing a direct public listing. As the company states, the lack of underwriters may lead to “greater volatility in the public price of our [stock] … immediately following the listing.” However, so far the company’s stock price has only fluctuated within less than a dollar of its initial price since its direct listing a month ago.
Lastly, perhaps the most significant turnoff for investors is the company’s current governance structure. Essentially, co-founders Peter Thiel, Alex Karp, and Stephen Cohen have a third class of stock that gives them almost absolute control over the company. Additionally, co-founder Joe Lonsdale no longer works at Palantir, but takes a consulting fee from the company and still owns a lot of its stock. The three aforementioned founders own 30% of the company’s stock, but maintain a combined 40% of votes. Palantir has also added an additional special class of voting stock called F shares, which are owned by the three founders in a trust. With these shares, the founders are guaranteed 49.99% of the total votes in most important decisions. This arrangement gives the founders more control over the company than almost any other public company today - eliminating any accountability that the founders would have to investors.
How would Palantir respond to the controversy surrounding it?
Palantir’s primary goal stands in stark contrast to the accusations the company faces every day; the company’s goal is the prevention of terrorism and other crimes and the preservation of Western democracy, while protecting civil liberties.
Palantir began as a software company whose services were primarily used for foreign applications, but over time the company’s governmental applications have shifted more towards domestic surveillance and law enforcement. With access to aggregate data used by these and other national agencies, the question arises: is our nation’s data safe with Palantir, and is our data safe from Palantir?
While scandals like the one including Cambridge Analytica would suggest that US data may be being mishandled by Palantir, Palantir would disagree. Here is how Palantir’s software is designed to prevent mishandling of data, at least by the software’s users.
Palantir’s software is built in a way in which people are only allowed to see and share what they are legally allowed to see and share, thus by design protecting civil liberties, according to the company. Whoever is in charge of the organization using Palantir’s software can see who is accessing what data, further protecting against any breaches in data security and privacy. This makes it difficult for small ‘cells’ within organizations to get away with misuse of data, as even if the ‘cell’ could hack their way through Palantir’s strong security software to see data they were not supposed to, their superiors could see if they have accessed that data. This tracking of who is accessing and sharing what data is Palantir’s crucial secondary line of defense against corrupt, illegal, or simply unintended uses of data.
However, Palantir co-founder Joe Lonsdale explained to Axios that although this is highly difficult to accomplish, if someone does something that is hidden from Palantir, it is likely that the organization is corrupt at the highest tier of its organizational hierarchy. According to Lonsdale, Palantir itself does not have access to all of the data people are using and accessing, but rather serves as a conduit for the data and provides the software necessary to collect, compile, summarize, and analyze the data.
Lonsdale says that the company seems secretive, because they do not have a built-up PR department and that their PR strategy seems to be to avoid PR in general.
In response to the controversy concerning Palantir’s clients that have been the catalysts for widespread activism against Palantir, Lonsdale stated that Palantir has resolved itself to enforce US law, whether or not management agrees with the laws themselves. Lonsdale continues to say that he himself disagrees with many of the immigration policies that Palantir enforces, but he supports the organization’s policy to enforce US law as a whole, no matter what the law may be.
Palantir has said that it could be harmed by “coverage that presents, or relies on, inaccurate, misleading, incomplete, or otherwise damaging information,” implying that the company believes much of the information circulating about Palantir is either false or designed to misinform individuals on the company.
Palantir’s primary argument for its merit is that it does help prevent major crime (not simply illegal immigration), such as child and drug trafficking with the software it provides ICE and terrorism both domestic and foreign by helping the NSA and CIA respectively. Palantir’s software was used by the International Atomic Energy Agency (IAEA) to verify Iran’s compliance with the 2015 agreement - an important assurance of US national security.
Palantir’s technology has clear applications with regard to national security, but the way the technology is being used and the company itself being run has given Palantir a murky reputation. With so little transparency on the company’s governmental operations, due both to national security concerns preventing the release of information and to the company’s notorious lack of PR, it is difficult to ascertain the exact facts of many of the controversies surrounding Palantir. However, it is safe to say that if America’s data was being handled with complete integrity, many of the incidents associated with Palantir never would have happened. Whether or not Palantir truly is saving us from more harm than it is causing, it is clear that further investigation and subsequent transparency is the only way it can be known for certain if Palantir has a positive role to play in the global political and business environment.
The thoroughness of your research is always very impressive, along with your dedication to writing these articles.
This is an extremely well-written and informative article. I feel persuaded that, while there are possible advantages to the services provided by Palantir, further investigation needs to be conducted into its potentially unethical use of data or possible violations of our citizens’ civil liberties. Very well written, thorough, and fair.