Palantir short thesis and an analysis of its current earnings power, multiples and enterprise value
Hello friends. I hope you all spent your weekend counting the profit you made on your puts on friday. This is a long analysis with a position at the end. I will discuss Palantir and its recent explosion in share price, as well as their current earnings, multiples on said earnings and their enterprise value.
So here’s something you may have read somewhere: Palantir is on a meteoric rise and has made a lot of you good fellows fabulously wealthy (right…?). Since 2021 this stock has been a retail favorite and this is in large part for good reason. I’m not going to recap the business model here but the company has its foot in many o’ business segments and has been bagging contracts left and right. They showed strong revenue growth, increasing margins (they turned GAAP profitable last year, a major milestone) and have enticed investors with promises of strong growth going forward. It is obviously a company that, for the right price, you want to be a part of.
Key phrase: *for the right price*. I am not allergic to growth investing and have often stomached high valuations if a company has an unrivaled business model and there is a strong enough runway for growth to eventually catch up with said high valuation. But I would like to make a case for Palantir being overvalued. In fact, the term overvalued does not even begin to scratch the surface of how incredibly bloated Palantir’s stock is.
For starters, let’s take into consideration palantir’s enterprise value. Despite the stock price rising roughly 50% versus its 2021 peak, Palantir’s enterprise value has ballooned much more.
https://preview.redd.it/6povwnwzcn1e1.png?width=1839&format=png&auto=webp&s=879ebbefc794996c48be08cbb0144c0ee9d675cd
This is due to the increasing number of shares outstanding. In December 2020, Palantir had 978M shares outstanding. This has risen to 2.2 billion as of their most recent filing. While palantirs growth has certainly been impressive, it is worth looking at this in the context of their increased share count. Their revenue per share metrics have been the following.
End of 2020: *$1.12*
2021: *$0.80*
2022: *$0.92*
*2*023: *$1.04*
LTM: *$1.19*
Palantir has only recently recaptured its revenue-per-share number that it had by the end of 2020. This is not necessarily a bad thing, but it needs to be placed into the context of this being a perceived *growth* stock. Yes, revenue is increasing - but the amount of shares outstanding has historically kept pace with this revenue increase. As a shareholder, your claim on this revenue has historically not risen proportionally compared to its revenue growth.
Likewise, their profitability can also paint a distorted picture. Palantir adjusts the heck out of their earnings. If it is even at all possible to adjust it to paint a better picture, you better believe Karp & co will do so. Many of Palantirs shareholders are retail and cite the non-GAAP numbers as if they even remotely reflect reality. Their stock based compensation is obviously a massive expense and should be a huge red flag, but one of the most overlooked aspects I found is that of interest income. Palantir has a massive cash balance (gained through dilution - shocker, i know) that they invest in short term investments to gain interest income. This is of course nothing new, lots of companies do this.
But consider this. In their last “blowout” quarter, Palantir gained $0.06 of GAAP EPS. This amounts to roughly $150M of net income, or about 1/1000th of their enterprise value. Of this number, $52M, or more than one third, was interest income. This is not a small footnote. Only $100M of their last quarterly earnings was actual, non-adjusted, no-nonsense operating income. Furthermore, they also paid only $7.8M of taxes on their income. This number is bound to increase over time as this is obviously a comically low tax rate.
And then there is the valuation. Palantir trades at 55x EV / sales. This means that if *all* of Palantir’s revenue was after-tax profits and paid out as dividends, it would at their current revenues take until 2080 until investors recoup their investments. Their current EBIT margin is a little over 13%. That 55x number is mindblowingly expensive and it is almost impossible to come up with any scenario that doesnt require:
A) incredible and sustained growth in revenue
B) a steadily increasing margin, and
C) an unreasonably elevated market multiple and no collapse in overall stock market multiples for a long time
We all remember Stock McNealy’s (SUN microsystems CEO) iconic quote when he was reflecting on the dotcom bubble
*“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”*
This is somethine else entirely. 55 times sales is something that under almost no scenario can end well. Remember, you still need upside! It’s not just about justifying the current stock price, it’s about penciling out *enough upside* in the current stock price that would justify taking an extreme risk by holding this stock for an extended period of time.
On friday, the stock market took a bath after roaring to new highs something like sixty times this year. Tesla, bitcoin and Palantir shrugged off the fear and continued to rise. Palantir added 11% and, with this move, added another five years of revenue to its elephant-sized market cap. This shows pretty clearly that Palantir is associated with meme-like risk assets. Who knows when the current market cap will reverse. It’s a game of liquidity. Musical chairs and all of the retail shareholders are playing. But one thing is clear: *their current EV / EBITDA is nearly 400x*.
The amount of retail shareholders I see online that are convinced that this will go to $100 amazes me. My question is: Why? Based on what? Sure, it shoots up 5% a day and this leads everyone to believe it’s an amazing company. But long-term, this company has enormous shoes to fill. It is currently a penny masquerading as a $100 bill. Palantir holders are currently feasting on lobster and caviar but the bill will one day be due. And unless these guys accelerate their growth to 40% annually for a decade and increase their margins to Nvidia levels, there is only one way this ride will end.
As it stands now, *all* of palantir’s equity is in the $5B cash position that they gained through dilution. Last quarter, the company earned $0.06 of GAAP EPS, of which $0.02 was interest income and only $0.04 was operating income. Aside from the $2 of equity per share, *all* of palantirs $65 share price is based on this $0.06 of earnings power and the future growth that the market is baking into this. In the future, growth will need to come from operating income as their cash position will not grow proportionally to keep 1/3rd of GAAP EPS in interest income. Their taxes will also go up in the future. If this is not a dotcom-level valuation, I do not know what is.
If you currently buy a 10 year bond, you will net roughly 4.5% in interest annually. Palantirs stock nets you 1,8% - *in revenue!*
All of this leads me to believe that this is a reasonable short opportunity. Thus, I am short for now, using graniteshares -3x Palantir (3SPA). I will look to acquire long-dated puts this week. Could get smoked some more, but that’s what makes a market.
Happy investing!