2023-11-21 11:30:54 ET
Summary
- The UK's National Health Service has signed a landmark deal with Palantir Technologies Inc. to create its Federated Data Platform.
- Revenue impact at 2.6% is respectable but not spectacular, more important are the optics of Palantir as a trusted AI partner to manage an entire country's healthcare system.
- Saving lives is diametrically opposed to killing bad guys, which is what Palantir's software has traditionally been known for.
- Palantir's wins in healthcare will turboboost the growth of its commercial business as it expands beyond national defense and intelligence use cases.
- Palantir Technologies Inc. stock rates a Hold due to recent price run-up, possibly as the result of NHS deal details being leaked.
After a two month delay, the UK's National Health Service has finally and officially signed a landmark deal with Palantir Technologies Inc. (PLTR) to create its Federated Data Platform, marking the biggest IT contract award in the history of NHS England.
The NHS is the UK's publicly funded healthcare system, responsible for 1.3 million doctor appointments and 260,000 hospital visits daily. Its 2022/2023 budget was £153 billion , it is the fifth largest employer in the world ( the largest non-military public institution), and it's the greatest source of British national pride according to an Ipsos poll (beating out British history, culture, arts, democracy, and the royal family!). In short, this contract is a big deal.
First let's look at the numbers. The NHS contract is worth a combined £330M (about $412M) over 7 years, with £25.6M paid out the first year and ramping up. At an average of ~$59M per year, the contribution to Palantir's annual revenues will be smaller than Palantir's AI/ML contract with the U.S. Army signed two months ago, which is $250M over 3 years. In practice, the NHS contract will be worth less still due to Palantir working jointly with Accenture (ACN), PwC, NECS, and Carnall Farrar in supporting roles, with the exact revenue split still unknown.
These numbers are good, but not mind-blowing. Palantir guides for revenues of $2.218B in the mid-range for fiscal year 2023, the NHS contract's annual payments amount to 2.6% of that; the total contract value is less than 1% of Palantir's market cap as of yesterday's close. It's also a reduction from the original anticipated contract amount of £480M over 7 years. A respectable win for sure, but nothing to write home about. What makes this a home run for Palantir is not the financial aspect, but the optics.
A Google search for "Palantir" will turn up many keywords commonly used in media coverage of the company: " spy tech ," " military contractor ," " CIA-backed ," " secretive ," " shadowy ." Palantir has spent two decades cultivating a reputation as a vendor of world-class software used by militaries and intelligence agencies, a reputation that may hinder as much as it helps the company's efforts to grow its commercial business. This is why UK non-profit Foxglove campaigned hard against Palantir's bid for the NHS deal, arguing that a company "funded by the CIA" with "no track record in healthcare" should not be allowed access to British citizens' sensitive medical data (Foxglove terminated its social media accounts two months ago as Palantir came close to the finish line).
Palantir gaining NHS England as a customer represents a key victory to reshape its narrative to be a trusted partner for peacetime organizations (such as the majority of civilian businesses), not only in Europe, but worldwide. After all, saving lives is diametrically opposed to killing bad guys, which is what Palantir's software has traditionally been known for. One of the fears surrounding the deal was that Palantir and the NHS are ideologically incompatible ; any future potential customers that would've shared such fears can now have them put to bed. This is massive for a company that's betting big on taking advantage of breakneck generative AI adoption in enterprise to accelerate the commercial side of its business, which is growing much faster than the government side.
Palantir has been employing a clever strategy of joining forces with healthcare organizations to earn private sector legitimacy for a while. Its inaugural Software for Government Summit (S4G) featured keynote speakers from organizations like the Centers for Disease Control and Concordance Healthcare; past AIPcons featured HCA Healthcare and the Cleveland Clinic. This approach makes sense because your average Fortune 500 company probably shares more in common with a major hospital network managing logistics than with Ukraine using MetaConstellation to target a Storm Shadow missile strike.
Landing the NHS contract is the biggest triumph of this strategy so far, with Palantir laying the groundwork going back years. The Financial Times reports that a company insider called the contract a "must-win deal." Palantir got its foot in the door at the beginning of the pandemic, collaborating with the NHS on the UK's COVID-19 datastore for just £1 . It later poached Indra Joshi, former NHS head of artificial intelligence, and Harjeet Dhaliwal, former NHS deputy director of data services. It hired consulting firms Global Counsel and Fleetwood Strategy to lobby on its behalf. Palantir's London branch is its biggest office globally , employing over 700 people.
Most importantly, Palantir delivered tangible value to the NHS: FT has a senior NHS official saying "If you were to compare the [successful] work that Palantir did in vaccines and PPE, with the work that Palantir didn't do, which was test and trace...[Palantir] hasn't let us down."
The "must-win deal" has been won: what does it mean for the stock? I'm bullish on Palantir as probably the best AI pure play on the market today, and just became even more bullish on the company, but I think its stock is fairly valued. Landing the deal to build British healthcare's operating system without having to give up lead role to a local firm (such as the Quantexa and IBM partnership) is the best outcome investors could possibly hope for, yet I believe much of this is already priced into the stock, which has run up 40% since the beginning of November:
There have definitely been insider leaks of varying credibility, as publications like Digital Health reported as early as two weeks ago about Palantir winning the contract, albeit without any sources and NHS England refusing to confirm. Bloomberg reported over a month ago that Palantir was in line to win pending official approval, sources also anonymous. Yesterday, UK newspapers The Guardian and The Telegraph broke that Palantir has won the contract, with an imminent official announcement coming from the NHS.
The adage "buy the rumor, sell the news" applies here: I first entered Palantir at $11 when it launched AIP, bought more at $15 after the Bloomberg report, and sold 40% of my position in the $21 range.
Although I remain very bullish on the company and its long-term AI strategy, in the short run I see Palantir Technologies Inc. shares as fully valued. Bank of America analyst Mariana Perez, who has been following Palantir for years, has a price target of $21 , which we've just breached. We haven't reached Dan Ives' $25 PT yet, but I'm not quite as confident as he is in the near term, while being quite confident that we'll get there eventually. As such, I rate Palantir stock a Hold on the back of the NHS deal win, and a Strong Buy if it falls below $15 again.
For further details see:
Palantir's NHS Deal Is All About The Optics