Will SPAC investments lift the Palantir share price?

The Palantir [PLTR] share price slipped 4.7% last week, in what has been a dismal couple of weeks’ trading. Since 28 June, the stock has tanked more than 12.5%, in contrast to the S&P 500 and Nasdaq’s respective 2.1% and 2.4% gains.

The Palantir share price was weighed down by the Biden administration cancelling its $10bn JEDI (Joint Enterprise Defense Infrastructure) contract with Microsoft [MSFT]. While Palantir isn’t Microsoft, it does rely on government contracts to keep it in business, which explains why shareholders suddenly got skittish after the White House shredded its contract with Microsoft.

But will expanding the customer base through investing in SPAC PIPE (special purpose acquisition company, private investment in public equity) financing help Palantir to broaden its customer base and make its share price more resilient?

What’s happening with the Palantir share price?

The Palantir share price is vulnerable to sudden movements for a few reasons. Having gone public via a direct listing in September, the stock has quickly become a favourite trade of the Reddit crowd — Palantir’s first-quarter presentation boasts of having 1.5 million individual investors. Innately, that’s going to inject some volatility into the Palantir share price.

Wall Street, on the other hand, is wary of the stock, with its $20 average analyst price target, according to Refinitiv data, suggesting a 14.1% decline on Friday’s closing price.

The other problem is that Palantir continues to burn through cash. In the first quarter of the year, it posted a net loss of $123m, compared with a $54m loss in the previous year. That comes despite revenue coming in at $341m, up from $229m seen in the same period last year.

Then there’s Palantir’s reliance on government contracts, such as the $800m contract it scored to deliver combat intelligence software for the US Army. That places another level of vulnerability in the stock.

Palantir targets SPAC investments to acquire customers

The perception around Palantir is that it is solely the preserve of governments or large corporations. Its first-quarter results do little to dispel this conception, with government sales representing the lion’s share of revenue at $208m, up 76% year-on-year, with an 83% jump in US government contracts.

To expand its reach, the company is taking a novel approach. According to Barron’s, Palantir has been investing in SPACs, or, more specifically, the PIPE funding that accompanies SPACs.

These publicly traded blank-cheque companies raise capital from investors with the expressed intention of finding another company to take public through a merger. A SPAC will also raise additional capital from institutional investors through PIPE funding.

Barron’s reports that Palantir has stumped up more than $100m to invest in at least eight PIPE transactions. In exchange, SPAC targets sign long-term contacts to use Palantir’s analytics platform.

Palantir’s biggest investment so far has been in German air taxi company Lilium, which is merging with SPAC Qell Acquisition [QELL], with Palantir shelling out $41m.

The second-largest investment was $21m in Sarcos Robotics, an industrial robotics manufacturer, which is going public through a merger with Rotar Acquisition [ROT]. Other investments include SPACs taking Babylon Health, Celuarity and Roivant Sciences public.

Shyam Sankar, Palantir’s chief operating officer, told Barron’s that Palantir only invests in about 10% of the deals it sees. For Sankar, the SPAC investment is a chance to combat the perception that Palantir is only suitable for large companies or governmental bodies.

“We don’t think that to be true,” he says. “With SPACs, we see a historic opportunity to invest in our customers.”

Where next?

Despite the recent drop off in the Palantir share price, this could be a chance to buy into a company that is still in its growth phase. Between 2021 and 2025 Palantir, expects an annual revenue growth of at least 30%.

Its commercial business is also growing. In the first quarter, commercial business generated $133m in revenue, up 19% year on year. At the end of the quarter, Palantir had bagged 15 deals worth $5m or more and six deals worth over $10m, with 4.6 years being the average contract duration for commercial customers. In the second quarter, Palantir expects revenue to grow 43%, to come in at $360m.

Should Palantir’s strategy of adding commercial customers through PIPE funding pay off, then it could add longer-term revenue streams. However, it could be an expensive way of growing.