Palantir's SPAC Investment Fails to Fuel Growth

The stock of Palantir Technologies Inc. (PLTR) has decreased by 7.97%.

Technologies Inc. employed a unique approach to contribute to the SPAC boom. The data-analysis firm invested over $400 million in startups that had also agreed to purchase Palantir's software. This resulted in a significant increase in Palantir's revenue, which was then publicized to potential investors. The wagers have not gone as planned.

Palantir's 20 startup investments, which include a flying-taxi business and a variety of electric-vehicle startups, have seen a decrease of more than 80% on average. Unfortunately, one of these investments has gone bankrupt and another has been delisted from the New York Stock Exchange. Additionally, more than half of these investments are warning that they may go out of business.

Founded by Peter Thiel in 2003, Palantir has ceased making investments. Its growth has decelerated and its stock has dropped by more than 60% in 2020.

Palantir has become a well-known victim of the recent rise and fall of special-purpose acquisition companies, which had become a popular way to go public in the last few years. This has caused losses for a variety of investors, including venture capitalist Chamath Palihapitiya and BlackRock Inc.

A Palantir representative declared in a statement that the market has shifted and it is now evident that these investments were not successful. They were a gamble on a collection of fledgling companies that, with the advantage of hindsight, they wish they had not taken.

Palantir's strategy has been met with some criticism. They have been known to make investments in companies and then sign contracts for revenue that are of a similar size. In some cases, the startups are required to pay back a large portion of the investment to Palantir within a short period of time after receiving the money.

Matt Simpson, managing partner at Wealthspring Capital and a SPAC investor, expressed his opinion that the pay-for-revenue strategy is not effective. He believes that more regulation should be put in place. Simpson also noted that Palantir's involvement in certain deals gave investors the assurance to invest in the startups, which could have caused other investors to suffer losses.

Investors who have taken a short position on Palantir stock have earned more than $1 billion in theoretical gains in 2020, according to S3 Partners, a data-analytics firm.

In early 2021, the company saw a surge in activity when it began providing financial support to companies merging with SPACs through private investments in public equity (PIPEs). This strategy allows startups to raise additional funds from professional investors to supplement the cash held by the SPAC, allowing them to expand their business as a public company.

Palantir had a well-defined strategy for its SPAC portfolio. It agreed to invest between $10 million and $40 million, and the startup reciprocated by signing a multiyear contract of a similar or higher dollar value. This agreement resulted in Palantir securing more than $700 million in total contracts.

Lilium NV, a flying taxi company with no revenue that was at least three years away from beginning production, was among those who signed up. Palantir invested $41 million in Lilium and the two parties entered into a five-year contract that paid Palantir $50 million. Additionally, Boxed Inc., an online grocery-delivery company, was given $20 million and also signed a five-year, $20 million contract. According to securities filings, Boxed paid $15 million to Palantir shortly after receiving the money from Palantir.

Palantir is a contractor for the U.S. government, Airbus SE, and United Airlines Holdings Inc. that provides software to help businesses organize and analyze large amounts of data. This service typically costs millions of dollars annually.

Palantir has expressed that their investment in SPAC was an effort to back up startups that could potentially become major clients in the future. At the time, Palantir had a large amount of money, totaling more than $2 billion at the end of 2020, which has since increased to over $2.4 billion.

Shyam Sankar, Chief Operating Officer of Palantir, declared on a May 2021 earnings call that the company is focused on achieving success.

It is not common for publicly traded companies to invest in startups that are also their customers, according to analysts. RBC Capital Markets analysts estimate that the contracts Palantir had with these companies represented a significant cost.

Rishi Jaluria, a managing director at Palantir, questioned why customers have to be paid to use the company's software if it is so good.

Although the contracts only accounted for a small portion of Palantir's $1.5 billion in revenue last year, they were a major contributor to the company's revenue growth, which is a key factor for investors. Analysts noted that the strong revenue growth was a major factor in Palantir's market value surpassing $50 billion in 2021, when the SPAC deals were at their highest.

According to filings, the contracts signed in the second quarter of 2021 totaled $925 million, which accounted for at least a quarter of the company's total revenue growth. RBC estimates that the contracts signed in 2021 bring in approximately $30 million each quarter. However, this figure is expected to decrease if more startups declare bankruptcy.

Neither side was successful in the arrangement for companies such as digital-manufacturing firm Fast Radius Inc., which had a SPAC agreement that estimated its worth at up to around $1.4 billion last summer.

Palantir has committed to investing $20 million in Fast Radius, while Fast Radius has agreed to a six-year contract worth $45 million.

A large portion of the approximately $100 million in cash that Fast Radius, a Chicago-based company, received from the merger when it concluded in February was attributed to that expense. This amount was much lower than anticipated after the majority of SPAC investors withdrew their funds prior to the agreement.

Fast Radius made a substantial payment of approximately $10 million to Palantir as part of their agreement.

Fast Radius experienced a major stock crash and, by early November, had to file for bankruptcy protection. Palantir, the company's largest unsecured creditor, is owed $2.9 million according to the bankruptcy filing. Unfortunately, the $20 million investment is now essentially worthless.

Fast Radius recently announced that it would be purchased by a technology company for an estimated $16 million following a bankruptcy sale.

At least 11 businesses that have received financial support from Palantir have notified their investors that there is a significant chance they will not be able to remain operational for another year without obtaining additional funds.

Three companies that are involved in the electric vehicle industry are Wejo Group Ltd., Faraday Future Intelligent Electric Inc., and Bird Global Inc. Wejo Group Ltd. specializes in electric-vehicle-data, Faraday Future Intelligent Electric Inc. is an electric-car startup, and Bird Global Inc. is a scooter firm.

According to RBC's research, a number of businesses have a limited amount of time before their cash reserves run out.

Mr. Jaluria commented that many of these businesses are not of high quality.