Transcription
Alex Karp, the founder of Palantir, sure knows how to get his investors excited. On the most recent call, he talked about how this is still only the beginning. A juggernaut is emerging; this is the software century, and we intend to take the entire market. The world is in the midst of a U.S.-driven AI revolution that is reshaping industries and economies, and we are at the center of it.
Perhaps a touch of hyperbole here, but there is a lot of truth in terms of the AI revolution and how Palantir (PLTR) stock is trying to leverage this revolution to enable companies to deliver services better, faster, and cheaper—all around acceleration and revolution. So, there's a lot of excitement going on with Palantir.
In this video, we're going to talk about their latest results, what Alex Karp and Palantir are up to, my thoughts on the valuation (because the stock clearly has done quite well), and where can Palantir go in the years ahead.
My quick jump to the conclusion takeaway is that a lot of investors have chased Palantir at this point, and I think you are better served to be cautious versus looking to chase. I would not advise that you chase.
Let's dive right into understanding what's going on with Palantir. My name is Daniel, and you're watching Unrivaled Investing.
Looking at Palantir, yes, this is what makes investors go bananas: they see revenue accelerate from 133% growth to 17% growth, all the way up to 30% growth in the most recent quarter. Investors generally, when you're seeing a sizable business (Palantir is a $150 billion market cap right now), do not see acceleration in revenue growth. Usually, you see, "Hey, this is the growth—it’s 30% this year, then it’s 25%, and then it slows down."
To see that sort of acceleration, going from 13% to 30%, means there's something new going on with the business that's reinvigorating their growth. There’s something special here.
What’s special, as you start to peel back the layers, is their commercial business is just going bananas, driven by the AI platform revolution. You see 54% commercial revenue growth and 77% growth in the number of customers. So, just all around, the AI revolution is not only in their historical government business but is now really impacting U.S. commercial businesses and U.S. enterprises.
You can see it across a lot of different customer referrals and quotes, talking about how it’s being implemented and how it’s saving time and tens of millions of dollars. For example, they talk about how the AI platform has helped reduce the length of stay in the hospital by 15% for patients with sepsis. That’s a big deal because you're talking about the cost not only to the hospital but also to the patients who are being hospitalized.
This is an overall huge improvement leveraging AI. This translates into a huge acceleration in revenue growth when customers and businesses can say, “Wow, this is a big deal! We can leverage our data, leverage a second pair of eyes that scans all of it using AI, to come to these conclusions, to come to better products, better services, and better processes.”
What's notable is that what was an initial boot camp for a bottled water manufacturer or an agricultural software provider leads to this company signing a seven-figure deal for agricultural software solutions less than two months later.
This is what’s driving the acceleration in the business: this AI revolution, where businesses say we need this to operate. This is critical.
Keep in mind, this is not just U.S. commercial businesses; the U.S. government is still a bigger piece of their revenue. That said, over time, it wouldn’t surprise me if commercial becomes the lion's share, but this is still a key part of their business, and they’re still winning contracts for their AI and machine learning solutions across the U.S. military and Western alliances.
This growth is translating into improved profitability. You can see how their operating income has gone from around $40 million just a few quarters ago to over $100 million. This is what investors like to see.
On top of this, they've been admitted to the S&P 500. So, now you start having index inclusion, which brings in forced buyers. If you buy the ETF, passive flows will lead you to buy Palantir stock as well.
Since then, you also have one of the board members of Palantir, who tweeted (this tweet was subsequently deleted), “We are moving Palantir to NASDAQ because it’ll force billions in ETF buying and deliver tendies to our retail investors.” I think he’s talking about profits by “tendies.”
Players hate, be player haters. He should have at least said, like, player haters be aware that we’ve been hated for decades—everything we do is to reward and support our retail diamond hands following. So, the retailers— that’s who we’re really trying to reward.
It's not himself, you know, who just sold $800,000 worth. It’s certainly not Alex Karp who just this past month sold a billion dollars' worth of Palantir stock. Those aren’t the people that are getting the rewards.
We’re doing it for diamond hands, baby! That’s what we’re doing it for.
Looking at the stock price, in the past year, it’s up around 200%. So, I think it is important to reflect: where does Palantir stock go from here?
I think it's important to bring some reality to this conversation. Gravity still applies, and as always, this is not financial advice.
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Looking at Palantir here, you have a stock that now trades back, effectively, where it was trading prior at the peak of the valuations—prior bubble peak—around 50 times sales. You can see it’s trading north of 50 times sales currently. That is incredible.
That is a lot of hopium, a lot of excitement that investors are giving Palantir here at this point. Some of it’s justified; some of it’s just investors looking at the growth and how they’re talking about U.S. commercial revenue, expecting a 50% growth rate and discussing $1 billion of adjusted free cash flow for 2024.
So, investors like to see this. The problem is that you're talking about $61 a share and around a $150 billion market cap, which means you're talking about 150 times free cash flow.
Now you might say, "Okay, there’s a lot more growth coming; maybe margins will improve a lot in the years ahead." The challenge is that even that growth rate—oh yeah, yeah, yeah—30% growth, everyone’s ooh-ing and aah-ing that it accelerated from 133% to 30%. I mean, maybe it’ll be 35%.
Hold your horses for a second because it's important to actually look at what's going on here. I think there’s a lot of hopium and excitement, and you need to fact check yourself. Check yourself before you wreck yourself!
Maybe one of the board of directors would tweet something like that because—if you factor in the share count—you can see this at AITicker chat: this is the diluted share count quarter year-over-year. It’s still growing at a pretty sizable clip, and they’ve talked about how this will moderate over time.
The most recent quarter is just shy of 6% year-over-year growth. You need to factor in that share count growth because when you do, sales growth drops from 30% to 23% when you consider that.
So, not quite as enticing! Still, I think there’s a lot of promise, a lot of excitement that investors should be mindful of, but let’s factor in this reality.
Let’s assume 25% to 30% growth in the years ahead, and that’s on a per share basis—faster than where they're currently growing, which is closer to 23%. Let’s say 25% to 30%, with 30% being sort of the upside.
Let’s assume 25% to 35% profit margins in the years ahead. They’re not there yet—they’re closer to 15%—so a more than doubling of their profit margins.
Let’s just look at the high scenario; let’s just look at this bull scenario. Let’s assume 30%, so significantly faster than where they currently are. Let’s assume margins more than double where they currently are, and let’s assume a 40 times earnings multiple five years from now.
In that case, you're underwater; you’ve lost money by roughly 15% over the next five years. This is a hypothetical valuation framework; stock prices can go way higher or way lower. It depends on sentiment, exogenous factors, what Wall Street thinks, and what type of multiples investors want to assign, as well as the execution of the business—does management deliver?
I look at this and think, “Wow! In this high scenario, you’re still underwater over the next five years.” If you get anything more conservative—which, by the way, they’re not near this low scenario right now (they’re at 15% versus 25% and at 23% versus 25%)—you’d say they need to get better in order to justify this low scenario.
This low scenario gets to more than a 50% loss. So, I think it's super important for investors to be mindful that long-term, three things drive your returns:
1. It's the fundamentals of the business—that’s number one.
2. It’s the cash flow that can get returned to you as a shareholder. They’re generating around a billion dollars a year in free cash flow. A lot of that stock-based compensation, let’s say it all gets returned to you at a $150 billion market cap—even if it continues to sell off, you’re still talking about less than 1% that can go to you.
3. The third factor we talked about—fundamentals, cash flow, and valuation.
I think investors have gone ahead of themselves here, so I would not chase Palantir stock because I think valuation could be a significant headwind for shareholders over the next five years.
As they go, “Wait a second, I thought that screen said 50 times earnings; it's 50 times sales. Oh my goodness, that's bananas!”
It wouldn’t surprise me if you had that sort of development over the next five years—maybe not quite like that, but I think you get the picture.
Frankly, there are just much better plays out there; there are much better plays where you can say, “Hey, here’s a company growing at X%—even a comparable growth rate—just trading at a fraction of what you see with Palantir.” So, there are better plays out there.
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