Transcription
Paler just had their most important earnings call ever. Whether you're a longtime Paler shareholder or you're wondering if it's too late to buy the stock, you should know that this isn't just about revenues or profit margins. Paler's latest earnings show us their place in the entire AI Revolution.
So in this video, I'll break down Paler's latest earnings call, one key insight that changed the way I value the company, and what that means for the future of the stock. Your time is valuable, so let's get right into it.
First things first, I'm not here to hold you hostage. Here’s what I’ll be covering in this video:
- Paler’s insane earnings results and the most important metrics that I'm watching to track their growth.
- Paler’s position in the crowded and competitive AI market.
- And of course, whether or not it's too late to buy Paler stock and where it goes on my list of stocks to get rich without getting lucky in 2024, which has done pretty well year-to-date.
There's a ton to talk about, but we have to start with this quote from Paler CEO Alex Karp: "The winners in AI will be powered by Paler and the losers will read analyst notes."
In his shareholder letter, Karp said, "This is the software Sentry and we intend to take the entire market." So, the winners in AI will be powered by Paler, and the losers will read analyst notes. That pretty much sums up my opinion on AI and Wall Street analysts. So, let's skip the analysts altogether and dive right into Paler's latest earnings call.
Paler reported record revenues of $726 million for the quarter, which is up by 7% quarter over quarter and 30% year over year. That's very solid overall growth, but things get really interesting when we break them down by revenue segment. Paler has four major revenue segments: U.S. Commercial, U.S. Government, Non-U.S. Commercial, and Non-U.S. Government.
I personally care about Paler’s commercial growth in the U.S. since that's the largest and most lucrative market for their platforms over the long term. But I'll cover each of them since they all contribute to Paler’s massive growth.
Today, Paler’s U.S. Commercial revenue came in at $179 million for the quarter, which is up by a solid 133% quarter over quarter and a massive 54% year over year, thanks to two key numbers that all Paler shareholders should care about.
First, their U.S. commercial customer count grew to 321 customers, which is up by 9% quarter over quarter and a whopping 77% year over year.
Second, their net dollar retention rate was 118% for the quarter, which is the highest it's been since 2022.
The reason those two metrics are so important for tracking Paler's overall growth is how they work together. 77% more customers means way more than just revenue; it also means new use cases for Paler’s software platforms, which means they can build new out-of-the-box solutions to convert even more customers down the road.
Their commercial platform, Paler Foundry, comes with tons of ready-to-use tools for a wide variety of verticals ranging from automotive and energy to healthcare, life sciences, and logistics and supply chain management. Building out new AI solutions for those markets, as well as new markets altogether, is one way that Paler can accelerate their growth.
On the flip side, net dollar retention rate measures how much more money existing customers are spending year over year. So, a 118% net dollar retention rate means that Paler’s customers are spending 18% more money with them this year over last year on average.
So, 77% more customers and 18% more revenue per existing customer is why Paler’s revenue growth has been accelerating for the last four quarters, growing by 20%, 21%, 27%, and now 30% year over year.
And it's not just commercial customers. Paler’s U.S. government revenue grew by 40%, and their overall government revenue grew by 33%. That huge growth shows us that they don't need to sacrifice one side of their business to grow the other, which was worrying a lot of investors and analysts last year when Paler reported just 10% government revenue growth.
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All right, Paler didn’t just crush analyst expectations in terms of commercial and government revenue growth; they also crushed it in terms of operating margins, reporting GAAP and adjusted operating margins of 16% and 38% respectively. That means their GAAP operating margins have more than doubled year over year, and their Rule of 40 score is at an all-time high as a result.
The Rule of 40 is another important metric to track, and it’s a great way to compare companies. Let me break it down for you. The Rule of 40 exists because the price-to-earnings ratio is not a one-size-fits-all metric, and many self-proclaimed value investors miss a lot of great investments just because their PE ratios are too high.
For example, let's look at Tesla stock over the last 5 years. The blue line is Tesla's historic price-to-earnings ratio. Back in June of 2020, Tesla’s price-to-earnings ratio spiked to over 800. But anyone who bought it then and held it until today literally tripled their money.
Here's Nvidia's 5-year price chart with their PE ratio in blue. Investors bought tons of Nvidia stock in 2023 after they began reporting serious data center revenue growth. As a result, their price-to-earnings ratio spiked from 50 to around 250 in a matter of months, and I got a lot of heat from value investors for buying the stock at all-time highs and crazy PE ratios.
But look what happened next: even though the stock price tripled, the PE ratio collapsed since Nvidia's earnings grew much faster than their market cap. I'm not saying that the PE ratio is a bad metric or that I never trust it, but I really believe that most investors use it as a crutch and as a way to justify not taking the time to understand the science behind the stocks, which is just my way of saying how the technology company behind the ticker symbol actually makes its money.
All right, so the Rule of 40 exists because the PE ratio can be very misleading for companies with high earnings growth—companies like Tesla, Nvidia, and Paler. The Rule of 40 says that even if a company has low earnings today, it could still be a good investment if its revenue growth and its profit margins add up to 40 or more. Paler's Rule of 40 score is 68 since their revenue grew by 30% and their adjusted operating margins are 38%.
A 68 might be an all-time high for Paler, but the whole point of the Rule of 40 is comparing against other companies, so let’s do that next. Here’s a website that measures how different publicly traded software companies score on the Rule of 40. The X-axis is revenue growth, and the Y-axis is margins. So, a company's position on this plot represents their score.
Companies above the diagonal line have a score of 40 or better, and the size of each bubble is their revenue multiple, which we can kind of think of as a PE ratio but for companies that may not have positive earnings yet. Anyway, Splunk, which got acquired by Cisco for $28 billion earlier this year, has a score of 53.
Adobe, with its massive portfolio of media editing and e-commerce tools, has a score of 51, and Salesforce has a score of 38. So, Paler's score of 68 is incredible compared to other publicly traded software companies. If we use Paler's GAAP operating margins of 16%, Paler would still have a score of 44, which means they would still be near the top of this list.
It's also worth mentioning 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 matures and competition increases over time. That’s why most companies either have high revenue growth or high margins, but not both.
So, Paler’s score of 68, coming from 30% revenue growth and 38% operating margins, means they’re absolutely crushing it.
All right, Paler’s U.S. customer count is growing fast. U.S. commercial customers grew by 77%, and overall commercial customers grew by 51%. Paler's overall customer count, which includes government customers, still grew by a whopping 39% in one year. Likewise, their U.S. commercial revenue grew by 54%, while their U.S. government revenue grew by 40%, showing that they don't need to sacrifice government customers to grow Foundry or vice versa.
Net dollar retention is up, operating margins are up, and the Rule of 40 score is at an all-time high. This was easily one of Paler's best earnings calls ever, but the stock price spiked by 30%, which means there’s really only one question left to ask: Is it too late to buy Paler stock, or are their best days still to come?
If we run a discounted cash flow model like on Simply Wall Street, we see that Paler stock is trading exactly at fair value. So, it’s not overvalued, but it’s certainly not a steal at these prices. But DCF models make a lot of assumptions, so let me offer a different kind of long-term perspective.
Technology tends to advance in cycles, and each cycle builds on the one that came before it. In the 1970s, we had around 1 million mainframe computers, but they were so big and expensive that only large institutions, government agencies, and enterprises really had them. By the early 2000s, there were a billion desktops in people’s homes and offices around the world. By the end of the 2010s, everyone had a computer in their pocket.
If you include tablets, laptops, desktops, and data center machines, there are more computers on Earth today than there are people. But that didn’t happen overnight. In fact, the mobile internet evolved in three distinct phases, and Morgan Stanley research expects the AI era to follow the same trend, which is where Paler comes in.
The rise of the mobile internet happened over a very long time. This chart starts in 2010, but remember the first iPhone came out in 2007, and Apple's App Store launched in 2008. It took 3 years for the iPhone to reach mass market adoption, disrupt Blackberry, and really usher in the era of mobile computing.
The same thing is happening today. We've all heard of AI by now, but it could be a few years before we’re all using it in our day-to-day lives. On the other side, this chart ends in 2016, but 5G mobile service didn’t even start rolling out until 2018, and there were tons of new mobile-first apps and services that launched during the pandemic.
While companies that build high-margin software and service platforms perform the best in the long run, they're the last part of the value chain to rise. That’s because they need an already established infrastructure to run on, like data centers and our smartphones. Before that infrastructure can be built, semiconductor companies need to build the chips to power it.
The rise of the mobile internet actually took anywhere from 8 to 15 years, depending on what we consider the start and the end. Now imagine that we had this same chart but for the AI era instead of the mobile era. ChatGPT was released 2 years ago, so we’d still be near the start of this chart.
That’s why many of my top stocks to get rich without getting lucky are chipmakers like Nvidia and AMD, as well as cloud infrastructure companies like Microsoft, Amazon, and Google. They’d represent the first two phases of our AI chart. The special thing about Paler is that they’re basically the only publicly traded Pure Play AI software company.
Imagine going back in time and investing in Google and Amazon right at the start of the mobile revolution; that’s what it means to be invested in Paler today at the start of the AI era.
But before anyone rushes to buy Paler stock at all-time highs, let me point out a few things about this chart. First, just because software tends to have the highest margins and the biggest returns over time doesn’t mean we should go all in on that group only. Semiconductors also performed very well over the entire time period, which is one reason I cover Nvidia more than any other company.
Second, check out just how volatile all three of these groups are—semiconductors, infrastructure, and software—all have sharp peaks and big drawdowns. The returns from software stocks took an especially long time to catch up to the other two groups.
So if this case study on the mobile era can tell us anything about the current AI era, it's that we should expect Paler to have a lot of ups and downs on its way to dominating the enterprise AI software landscape.
Now that we have all that context, let me show you where Paler goes on my list of stocks to get rich without getting lucky. And if you feel I've earned it, consider hitting the like button and subscribing to the channel. That really helps me out, and it lets me know to put out more content like this.
Thanks! And with that out of the way, let me walk you through this list. I still think that Microsoft is the king when it comes to implementing AI into enterprise software. They also have a huge and diverse technology portfolio that includes their Maya data center accelerators and Cobalt CPUs, their Azure Cloud infrastructure, and their deep partnership with OpenAI. So they’re positioned to benefit from all three phases of this AI era that we just talked about.
Nvidia is a very close second because they're the current king of AI hardware, and I don’t see that changing anytime soon. They’re so far ahead and moving so much faster than every other chipmaker, not to mention all the software that they’ve built on top of their hardware ecosystem. Nvidia reports earnings in a couple of weeks, and if they over-deliver like they have been, they’re the only company that might knock Microsoft out of my number one spot.
On the other hand, when I made this list in December of 2023, Paler started in the number nine spot because I had concerns about their overall go-to-market strategy. I was obviously wrong, but good investors put their egos aside and learn from their mistakes. My concerns are long gone, and it's clear that Paler is firing on all cylinders across a massive total addressable market, from heavy industries and national security to finance and life sciences and beyond.
So, my plan is to keep dollar-cost averaging in, which means I’m buying fewer shares as the price gets higher. The next time there's a big dip—and there will be a next big dip—I’ll load up on more shares since we know that Paler’s fair value is currently around $50 per share, at least according to Simply Wall Street's DCF model.
With all that said, I’m moving Paler stock up one more spot on my list, just above Amazon. That’s a huge move and probably the last one I’ll make considering how confident I am in Amazon Web Services, Amazon.com, the Prime ecosystem, and how far up this list Paler has already moved over the last 10 months.
But this is why it’s so important to understand the science behind the stocks. If you want to see what else I’m investing in, check out this video next.
Either way, thanks for watching, and until next time, this is Ticker Symbol U. My name is Alex, reminding you that the best investment you can make is in you.