Transcription
Paler is one of the most powerful AI companies in the world because they build some of the most powerful AI platforms in the world: Apollo, Gotham, Foundry, and AIP.
However, Paler stock crashed hard after their most recent earnings call, going down by over 15% in the last week alone. With such a sharp decline, there's really only one question left to ask: was this the top for Paler stock, or is Wall Street missing something big? Your time is valuable, so let's get right into it.
First things first, I'm not here to keep you hostage. Here's everything I'm going to talk about upfront: I'll walk through Paler's latest earnings results and show you what Wall Street analysts are missing when they cover them. I'll highlight some solid resources to learn more about Paler platforms, and I'll update where Paler is on my list of stocks to get rich without getting lucky.
All right, let's start with Paler's earnings. I actually wasn't planning on covering Paler's earnings at all since there's already so much great content out there, but then I saw this quick clip from Yahoo Finance:
"Shares of Paler sliding after hours after reporting first-quarter earnings despite the company beating on the top line and raising its full-year guidance. They raised their forecast for annual revenue."
Initial pop, but now we're down here about 9% in the after-hours. What is going on here?
I would say it's a combination of a couple things. It's high expectations because this has become a hyped—or in my opinion, overhyped—generative AI beneficiary company. And at the same time, you see U.S. commercial decelerating. Last quarter, they put up 70% U.S. commercial growth; now they're growing U.S. commercial 40%. The compare itself just gets a little tougher. I think that 70% commercial number that they posted last quarter was maybe boosted by just a very, very easy compare and some one-time impacts.
Government agencies are actually looking to reduce their dependency on Paler and maybe multisourcing, using multiple vendors. So I think there actually could be a little bit of mixed results in the government business over the next couple of years.
You know, I will also say, the government business is probably the stickier, better quality business for Paler, but it's not a high-growth business, and I think that's why they don't emphasize it nearly as much as they do the U.S. commercial business.
Rousi Jura is a software equity analyst at RBC Capital, and according to him, Paler is an overhyped software company with a $5 price target on the stock. If you've been watching this channel for a while, you know that one of my biggest issues with the mainstream finance media is that they never fact-check what analysts are saying or really push back on specific points.
Let me show you the big difference between how they're covering Paler's earnings and what was actually said on the earnings call:
"I think it is fair to say we crushed Q1 in the U.S. We are on fire. You see it in the deal growth in the U.S. growing from 70 to 136 in a year. You see it in the general enthusiasm around our products, especially in commercial but also in government, which has begun to re-accelerate. You see it in our customer growth in U.S. commercial, which grew 69%. And again, we are growing these numbers while maintaining a rule of 40 score of 57, which basically means we're doing the impossible. We built software infrastructure that allows enterprises, both commercial and government, to move beyond chat, move beyond self-pleasuring, to actually produce things that are valuable."
I'll get back to that self-pleasuring thing a little later in the video, and I'll get back to how Paler helps enterprises get real value out of large language models a little later in the video. But since there's such a huge difference in how Alex Karp and Yahoo Finance are talking about Paler's latest earnings, let's dive into that first, starting with this whole rule of 40 thing.
Again, we are growing these numbers while maintaining a rule of 40 score of 57, which basically means we're doing the impossible. Because price-to-earnings ratios can be so misleading for early-stage SaaS companies, the rule of 40 was created as another quick metric to evaluate them. Even with a high price-earnings ratio, a SaaS company could still be fairly valued if their growth rate plus their profit margins are greater than 40.
Paler's rule of 40 score is 57 because their revenue grew by 21% year-over-year, and their adjusted operating margins were 36% for the quarter, which by the way, is a whopping 50% increase year-over-year. That shows a lot of financial discipline for a company that achieved operating profitability just 5 quarters ago.
So, 21% revenue growth plus 36% operating margins equals a rule of 40 score of 57. But is that good? Is it bad? Well, instead of guessing, I found a list of SaaS companies and their scores, so let's walk through it together.
Splunk, which just got acquired by Cisco for $28 billion, has a rule of 40 score of 56. Adobe has a score of 52. CrowdStrike and Salesforce both have a score of 40. UiPath has a rule of 40 score of 36. Shopify and Dropbox are both at a 31, and Zoom has a score of 15.
It's also worth pointing out that as a company's score goes up, each point is harder to achieve than the last, since a company would have to sustain very high growth rates or very high operating margins as their market grows and their competition increases over time. That's why most of the companies on this list either have high revenue growth or high margins, but not both.
So according to this rule of 40 data, Paler is absolutely crushing it with their score of 57. Paler's revenue growth has been accelerating for the last four quarters as well, growing by 13%, 17%, 20%, and now 21% year-over-year. Those numbers are even better for their commercial business, where Paler's commercial revenue grew by 27% overall and 40% in the U.S. So in one or two quarters, they'll finally be making more money from commercial companies than government agencies, which is a much smaller total addressable market.
Another thing to consider is that commercial businesses typically make large software and subscription purchases at the end of the year to lower their tax burden, and the U.S. government's fiscal year starts in October, so that's when different agencies and military branches get their budgets. That's why the fourth quarter is usually Paler's highest quarter for growth. But if that's the case, then why did Paler grow even faster in quarter 1? The answer is their AIP boot camps, which are hands-on working sessions where participants can work directly with Paler engineers to build real solutions using real company data in less than a week.
Underestimating the power of these boot camps is the exact same mistake that I made last year, which is why I decided to make this video after seeing this clip from Yahoo Finance:
"What about, Rishi, this company's boot camps where they get customers up and running fast with their AI software? Smart strategy, in your opinion?"
"I think it is, but I would again put a little bit of skepticism around that boot camp strategy. I think, number one, remember that Paler is very heavy customized software, right? I estimated more than 30% of their business is actually professional services and outsourced data science rather than actual true software. So I don't know that is even the right fit for something like a boot camp. But it doesn't go from there to a customer becoming a multi-million dollar Paler customer overnight, which is how they make it sound on earnings calls. But in reality, a lot of times those boot camp customers might do multiple boot camps, or they might turn into a pilot customer over time. It's not nearly the game-changing to go-to-market that I think they claim it to be."
AIP boot camps are a game changer for Paler, and I can prove it. The way they work is that experts and decision-makers can plug in their own company data, even if it's sensitive, and use AIP to build their own AI tools and workflows. That means they leave these boot camps with AI use cases that are close to production-ready and with enough hands-on experience to actually start implementing them. On top of that, Paler partners can run their own boot camps, which effectively makes them an extension of Paler's sales team, and that helps AIP's adoption compound even faster.
Alex Karp often says that the explosion in demand for Paler's platforms comes from shifting to this more hands-on go-to-market strategy with these AIP boot camps.
"Well, everyone's claiming to do things, and we're showing them being done. We could hire marketing; we've never been good at marketing. We could run around and say there are 50 things we do better. There are also certain technical things that we've built that people don't understand their value yet, so it's better just to show the value of an ontology."
But let's not take his word for it; let's look at the data. Paler's U.S. commercial customer account is up by a whopping 69% year-over-year and 19% quarter-over-quarter, even though quarter 4 is usually their strongest quarter. That's why Paler closed 136 U.S. commercial deals last quarter, which is more than one deal a day and almost twice as many deals as they closed this time last year.
This is really why Paler's growth picked up across the board after they started running these AIP boot camps in earnest. If that's not the definition of a game changer, I don't know what is.
All right, that's the what. Now let me show you why there's such a big disconnect between Paler's earnings call and how the mainstream media has been covering it.
"Rishi, obviously you're not a fan—you've got an underperform on the shares here. We see it coming back to Earth today, but the market has not been on your side thus far this year. There has been the stock has rallied, there definitely are a lot of Paler buyers out there. Where do you think this sort of disconnect lies between that perception of Paler as an AI winner and what you're saying, which is that in truth it might not be?"
"I think it comes down to that perception around exactly what is Paler, exactly what is AIP. Because when we talk to actual technologists who are deep into AI, deep into ML, who know more about this topic than I could ever hope to over my life, they are expressing skepticism around Paler, and especially around AIP, and whether they are what they say they are from an AI perspective. What I think it comes down to is Paler's messaging that they are this cutting-edge generative AI company. They message a lot around AIP and boot camps, and I think very deliberately target retail investors. Look, everyone wants to play the AI game. Don't get me wrong; I'm a huge believer in AI—especially generative AI technology. I think it is going to change society as we know it. I just don't think Paler is that cutting-edge generative AI company that they claim it to be. I'm not saying it's not a useful company, but it is not what they claim it is. I would say to any investor that really wants to play this AI trend, go buy Microsoft. They are doing a lot more when it comes to generative AI, plus they have that very deep partnership with OpenAI, which to me is one of the most important companies in the world today. I think Microsoft is a much better way to play the AI wave than Paler."
All right, so Rousi is actually right about a couple of things here, which we'll get back to in a second. The big thing he's wrong about is that Paler isn't really claiming to be a generative AI company in the first place, and this is where Alex Karp's comments come back in:
"We built software infrastructure that allows enterprises, both commercial and government, to move beyond chat, move beyond self-pleasuring, to actually produce things that are valuable."
I love this job. Paler does not make large language models; in fact, they don't make any generative AI models at all, and they don't have to. Paler Gotham and Foundry platforms enable data science across an entire organization by giving everyone one consistent, real-time view of their enterprise data. They do that by helping companies create digital twins, which are also called ontologies. At a high level, an ontology is just a map of a company's resources and how they all relate to each other, which makes them a great way to see the big picture for large and complex enterprises.
Paler platforms help companies build and use these ontologies to do things like analyze mountains of proprietary data, track inventories, assets, and resources, and optimize logistics chains, manufacturing processes, and other forms of operations for multinational multi-billion-dollar companies. That's a lot of stuff to keep track of, especially since things are constantly changing in real-time.
The problem is that Gotham and Foundry are pretty complicated products themselves, and in my experience using Foundry, the learning curve can be pretty steep. That's where AIP comes in. At a high level, AIP lets users interact directly with their company's ontology through prompts. So instead of coding or manually creating different data sets and dashboards, users can interact with AIP kind of like how they would with ChatGPT. And not just ChatGPT, because AIP can support any third-party large language model that a company chooses.
It lets enterprises set rules and guard rails on what the model can access, which tools it can use to calculate answers, and limit hallucinations. It can control the different kinds of actions a model can take and keep a full audit log of everything the model does—what resources and references it used and everyone who prompted it in the first place. That's how AIP adds real business value to generative AI models without being a generative AI model itself.
This is why it's so important to understand the science behind the stock for yourself. I know this video is a little long, but I wanted to be thorough since there's such a big disconnect between the rhetoric and reality around AIP, Paler, and their latest earnings, including the rule of 40 and how Paler's score of 57 stacks up against other SaaS companies.
They're accelerating growth in commercial revenues, customer accounts, and they're expanding operating margins. That gives me all the context I need to really decide where Paler goes on my list of stocks to get rich without getting lucky.
So if you feel I've earned it, consider hitting the like button and subscribing to the channel. That really helps me out and lets me know to put out more research like this. Thanks, and with that out of the way, let me show you where Paler currently sits on my list of stocks.
Like I said earlier, Rousi was actually right about a couple of things in that last Yahoo Finance clip. Microsoft is the current king of generative AI software, especially with their deep partnership with OpenAI. That's why it's been the top company on my list all year.
Nvidia is a very close second because they're the current king of AI hardware, and I don't think that's changing anytime soon. They're just too far ahead and moving too fast for other chip makers to catch up. Nvidia reports their earnings in a couple of weeks, and if they over-deliver like they have been, they could end up in the number one spot.
On the flip side, Paler started in the number nine spot on this list because of all the concerns that I had last year. But Paler has proven time and time again that AIP seriously lowers the barrier of entry to use AI across almost every market vertical—from national security and heavy industries to finance and even drug discovery.
And their AIP boot camps are a huge game changer for getting those industries to adopt their platforms in the first place, which we saw when we dove into their earnings data. Despite the current mainstream media narrative, Paler's go-to-market strategy is clearly working, which is why I'm moving Paler up one more spot on this list.
That's a pretty big move considering how confident I am in each company at the top of this list and how far up Paler has already moved over the last 5 months. That's why it's so important to understand the science behind the stocks.
If you want to see how I pick these stocks, here's the video where I walk through it step by step. Either way, thanks for watching, and until next time, this is Ticker Simple U. My name is Alex, reminding you that the best investment you can make is in you.