“Technology is the knack of so arranging the world that we do not experience it.” – Said American existential psychologist Rollo May
Mad Hedge Technology Letter
March 5, 2021
Fiat Lux
Featured Trade:
(THE NEXT BIG TECH GROWTH NAME)
(PLTR)
They are the tech company that beat out Lockheed Martin, BAE Systems, and 14 other unique systems to snatch an NSA contract to provide data analytics to the Five Eyes Alliance in 2011. Palantir has never looked back.
This could become the next 10-bagger.
It’s been that type of overperformance for Palantir since its inception in 2003.
By 2009, they had already amassed over $1.2 billion worth of government contracts and Palantir has already gone through 18 years of product development and spent more than $3 billion on R&D.
Palantir has an unswerving mandate to serve the U.S. government and its allies which has been an effective way to market its services.
This narrow message has effectively knocked out competition from Microsoft, Google, Facebook, Amazon, and Apple who have taken a “friends with everyone but friends with no one” approach to their business empires.
Their companies’ employees have protested against any type of government work with the U.S. army, withering at the thought that they would be responsible for blood on their hands.
Palantir makes sure that prospective employees understand where revenue is procured from and make no apologies for it.
Summing up Palantir is hard to do, but they really are the swiss army knife of data analytics that provide a platform in order to carry out executive decisions that put together trillions of data points from public, private, and secret sources into an easy to use, integrated, one-stop shop system.
This has worked wonders for the U.S. defense agencies and why CEO Alex Carp doubled down with Palantir’s five-year outlook of greater than $4 billion in revenue in 2025.
Starting in 2021, Palantir expects greater than 30% annual revenue growth each year for the next five years.
And in Q1 of this year, Palantir expects revenue growth of 45% or $332 million.
The strong outlook fuses with a sensational full-year 2020 performance of $1.93 billion in revenue, up 47% year over year. Fourth-quarter revenue was $322 million, up 40% year over year, and roughly $21 million above a prior guidance range.
Government revenue accelerated in the fourth quarter growing 85% year over year to $190 million.
Palantir signed several large deals in the quarter including a three-year $44 million expansion with the U.S. Food and Drug Administration and a two-year $31 million agreement with the NHS.
Some of the other deals signed were a multi-year contract with Pacific Gas and Electric to help it streamline operations across the company.
PG&E will now be able to perform root cause analysis and upgrade monitoring.
This should improve PG&Es electric operations and asset management, resulting in enhanced safety and grid reliability.
Palantir has deepened a partnership with BP. And in the fourth quarter, they signed a five-year nine-figure enterprise renewal and have an ongoing relationship with BP since 2014.
The largest part of Palantir’s annual revenue comes from the U.S. military with full-year government revenue rising 77% to $610 million, led by ongoing momentum in the U.S., which grew 91%.
Its Army operation continues to expand.
Palantir recently won a pair of new contracts with the Army to accelerate its modernization efforts.
Palantir was also the beneficiary of the U.S. Army executing its first option year with approximately $114 million as part of a partnership on the Army Vantage program.
Under the $8.5 million Phase 1 contract, Palantir will collaborate with the Army to demonstrate a solution that integrates space, high altitude, aerial, and terrestrial sensors for use in intelligence command and control.
In November 2020, Palantir was selected to provide a prototype for the Army's common data fabric and data security solutions.
Palantir provides an integrated solution that will ultimately improve access to critical data for commanders and soldiers, deliver efficient use of networks and denied integrated environments, and increase the collaboration with joint and allied partners.
The strength isn’t just relegating to U.S. government contracts, Palantir is experiencing intensive growth of existing customers with average revenue per customer growing 41% to $7.9 million.
They grew the number of accounts with $10 million of annual revenue or more by 50%.
For the full year 2020, 43% of Palantir’s revenue was generated from new customers in 2018 or later symbolizing their improving ability to rapidly onboard customers.
Palantir is also just scratching the surface of their commercial business heading into 2021 that saw a revenue rise of 107% year over year in fiscal 2020.
Growth tech firms typically preside over a margin problem at this early stage but Palantir exhibits some of the best margins around with full-year adjusted gross margin of 81%, up 1,000 basis points, compared with full-year 2019.
The year-over-year improvement in gross margin was driven by increased automation and efficiency in the delivery of our software.
Palantir is at the cutting edge of data analytics and whether it’s helping Fortune 500 companies navigate climate change headwinds, implementing Brexit policies for British companies, or modernizing U.S. military operations, they have seized the highest quality revenue possible.
The data analytic company is certainly a play on cyber espionage that is poised to explode on the sovereign and economic level as adversaries have bold plans to weaponize 5G.
One pain point is the overreliance of government contracts; however, I would argue that they are scratching the surface with the commercial operations and the path of least resistance for commercial revenue is up.
The pathway to grow from today’s $38 billion to $200 billion is wide open and if Palantir deploys their best of breed management to grow revenue 30% for the next 5 years, this is easily a $100 stock in the next 2 years.
“I'd rather Apple cannibalize Apple than somebody else cannibalize Apple.” – Said CEO of Apple Tim Cook
Mad Hedge Technology Letter
March 3, 2021
Fiat Lux
Featured Trade:
(U.S. CHIP SHORTAGE IS REAL)
(WDC), (AMD), (MU)
Yes, the price is going up. And no, I am not talking about monthly grocery bills, but the price of semiconductor chips that help operate iPhones and will power autonomous driving vehicles.
The situation is so dire that US President Joe Biden signed an executive order calling for a supply chain review of semiconductors and IT technologies.
Yes, it’s that bad.
The drastic and imminent chip shortage is impacting a wide swath of tech firms we cover here at the Mad Hedge Technology Letter.
The order will also “facilitate needed investments to maintain America’s competitive edge and strengthen U.S. national security.”
Biden’s proactive decision to sign the executive order comes on the heels of several top U.S. semiconductor executives persuading US President Joe Biden earlier this month to resuscitate domestic chip manufacturing with “substantial funding” as part of the White House’s economic recovery and infrastructure plan.
In the fact sheet for the executive order, the White House said supply chains for semiconductors and advanced chip packaging technologies will be among four key areas where federal agencies will be directed to commence a 100-day review.
The White House acknowledged a massive underinvestment in semiconductor production that has caused manufacturing to shift abroad.
The critical issue was emphasized by U.S. semiconductor executives in a recent joint letter to Biden.
The US has leaned on foreign manufacturing for many products in the past 50 years, but semiconductor chips are the ones that could force US tech companies into a losing position and offer a pathway for Chinese tech firms to seize their chance as top dog.
The 100-day supply chain review will also look at critical minerals, including rare earths that are used for a variety of products, as well as large-capacity batteries and active pharmaceutical ingredients.
The shortages of chips and other components are a very real issue that can have a material impact on several adjacent industries, including bioinformatics companies and mechanical parts manufacturers that rely on simulation and modeling applications.
How does this affect chip companies?
Let’s take a look at one, Western Digital (WDC).
Shares are trading higher on signs of improving pricing in the flash-memory market.
I am short-term bullish on Western shares because a meaningful memory-chip price rise is in the cards for both flash NAND and DRAM.
A blast from the past Silicon Valley dinosaur that began as a disk-drive manufacturer, Western diversified into flash-memory products via its 2016 acquisition of SanDisk.
Encouraging NAND pricing also benefits Micron Technology (MU), which makes both NAND and DRAM chips.
The most important takeaway from my channel checks is that despite increased attempts by cloud and enterprise customers to lock in prices for second-half delivery, end contract numbers aren’t reflecting any good deals for the end buyer.
Manufacturers are convinced with their newfound pricing power and will wield it to full effect.
Expect significant price increases until the shortage is cured, and this could result in many end projects being shelved because of funding issues.
For semi chip firms, a bountiful harvest will make 2021 earnings report glisten in the form of meaningful expansion in margins, which have been under pressure since 2018.
My initial prediction is that prices will rise 5% to 10% from the fourth quarter—and that pricing for the second quarter is tracking up another 10% or more sequentially making it a 20% rise in less than half a year.
Memory manufacturers like Micron (MU), AMD (AMD), Samsung, and Western Digital (WDC) are in line to overperform in 2021.
“My goal wasn't to make a ton of money. It was to build good computers.” – Said Co-Founder of Apple Steve Wozniak
Mad Hedge Technology Letter
March 1, 2021
Fiat Lux
Featured Trade:
(HOUSING GOES DIGITAL)
(Z), (RDFN)
One of the more bizarre knock-on effects of the health crisis is the swaths of people doing at-home reconnaissance work on where and how to relocate via the online real estate platform Zillow (Z).
When a polar vortex hits the South of the United States causing electricity bills to spike north of $6,000 per month and folks to boil snow to flush toilets because water treatment facilities are down, you bet that internet search for relocation would explode in a heartbeat.
Well, Zillow makes this a reality and facilitates the better understanding of what type of houses are where and for what listing prices giving users access to an interactive map of properties for sale.
Not only are homes for sale listed, but Zillow has a thriving rental market function where many landlords post units for rent with contact information and details.
The pandemic has been a godsend for Zillow who was floundering before the virus.
Stuck between migrating to selling properties directly from the platform and a slow-to-move advertising business, they couldn’t get their act together.
Fast forward to today, clicks and eyeballs on Zillow have skyrocketed with some looking for larger homes.
Looking for a house during climate change is the new thing to do.
And then there are those who don't even know why they are endlessly looking at listings on the real estate site and most likely because they are bored.
Whatever the reason, the result is clear: Zillow's website traffic numbers are surging.
Some regions have felt some serious follow-through with the newfound attention like the state of Florida.
With its moderate temperature and suppression of state taxes, it's no surprise to see Miami, Tampa Bay, Palm Beach, and Fort Myers, Florida in the top 20 in terms of traffic. Broader demographic and structural shifts also lifted Pennsylvania cities like Scranton and Allentown.
The top three were Las Vegas, Stamford, Connecticut, and Austin, Texas.
Of the 100 largest metros in the country, every one of them saw an increase in traffic.
Millennials are the largest generational group in the country and they're barreling towards home-buying years. They're hitting their mid-30s. They want stability.
Zillow describes it as “the great reshuffling,” and it's leading to a lot more than just a spike in Zillow traffic.
In all four corners of the country, the property market is scolding hot and the median time that a home goes on the market and then goes to pending is 17 days as of December.
That's 25 days faster than a year ago.
How do the numbers look under the hood?
Gangbusters.
Zillow had 9.6 billion page visits to its website and to its app in 2020.
That was up 1.5 billion from 2019.
Zillow shares have been the ultimate benefactor with shares surging up around 500% since the March 2020 bottom.
The ongoing growth acceleration in the real estate macro environment, a sustainable shift in real estate activity online, and the longer-term opportunity for these companies to capture share of industry economics all bode well for the stock price.
Given the pandemic driven outperformance across the internet sector, with housing activity and buyer demand continuing to accelerate, new listings growth and velocity offsetting challenges to supply and lower mortgage rates drive a more affordable buyer environment despite meaningful home price appreciation.
I expect that the macro impact alone will lead to upward forward earnings revisions in the category as companies report results.
I believe that a tectonic shift of real-estate activity online continues.
Lastly, Zillow’s investments in technology and business model evolution which improves conversion of site visitors to home buyers and sellers, increase purchase and sale options, and enhance the experience for agents and consumers.
In the end, this will increase the number of property purchasers.
It’s hard not to see financial outperformance in the near-term future for Zillow.
The growth in the existing home sales market and home price appreciation will continue to benefit Zillow and I expect views of between 13-14 billion in 2021 which sets up the opportunity for Zillow to beat in revenue and profitability. I would also take a look at Redfin Corporation (RDFN) who has a similar business model.
“It has become appallingly obvious that our technology has exceeded our humanity.” – Said Scientist Albert Einstein
