Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. I have no business relationship with any company whose stock is mentioned in this article. Please. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. Due to the fact that a high-growth company also has many other ways to invest its operating cash flows, apart from using them for buybacks, it seems likely that buybacks will not be a priority in 2021 and 2022, and possibly beyond that. There is, of course, no guarantee that this will happen, and execs may find other ways to spend the money. (New pick just posted.). Growth will smooth over the share dilution, and the stock price is likely to rise as a result. Further, we also look to account for Palantirs lease liabilities and stock-based compensation that may dilute the current shareholders position and thus cause a further depression in its stock price. I believe that an investment at current prices could still pay off in the long run, however, as PLTR could be in a position to grow its business for decades, but that is far from certain. I wrote this article myself, and it expresses my own opinions. With the dilution effect accounted for (representing over US$3B in dilution across 246M shares), Palantirs true fair value per share will be priced at US$20.75 via EBITDA multiple method and US$20.18 via terminal growth method. The real question isn't compensation but dilution and share count. Despite these weaknesses, I remain bullish on Palantirs future. Palantir specializes in big data analytics. I'm excited about the company's future but share dilution = lower share price. Its CEO, for example, received a massive $1.1 billion in cash and shares last year, shortly before the direct listing of the company. Today, Palantir trades at $22, for a $42 billion market capitalization. Changes in these assumptions may have a material impact on the backtested returns presented. Just as it looked as though Palantir Technologies (NYSE:PLTR) would rally again, its quarterly earnings rained on its parade. Expect the company to win more customers in the coming year. Now, let's ignore share count just for a moment. Learn More. PLTR's unique software can create significant operational value for its customers, and ongoing global disruptions like the pandemic and war can help to catalyze adoption further. Leo Sun owns C3.ai, Inc. and Palantir Technologies Inc. Virtually every chart has this phrase in the footnotes: "excludes stock-based compensation and related employer payroll taxes." Palantir generated $1.09 billion in revenue in 2020, but it posted a whopping net loss of $1.17 billion. ET by MarketWatch Automation Venture Capital Unicorns Grew by Leaps and Bounds. First, the company is growing its commercial revenue. Certainly, that's a view in the rearview mirror. Banks may justify the return on investment (ROI) based only on the speed of the installation. Palantir is a high-growth company that operates worldwide in both commercial and government segments. (You are fully protected by Seeking Alpha's unconditional guarantee.). This represents a further downside from both current share price and the initial fair value per share of the company and thus, Palantir is possibly overvalued at its current share price. For the first three quarters of 2021, the company has revenue that exceeds $1.1 billion. The company is one of the most trusted analytics platforms for the U.S. government and its allies. Analyst Report: Palantir Technologies Inc. NYSE - Nasdaq Real Time Price. Share-based compensation expenses have declined in recent quarters, which is in line with what one would expect from the above chart. Actual performance may differ significantly from backtested performance. Palantirs historical numbers are consolidated from FY18 to FY20 and projections are conducted from FY21 to FY27. For now, investors should assume the stock is stuck in a $22 $27 trading range because earnings per share are not expanding. So while there will likely continue to be some selling in the next few years, investors may have to find something else to object to. I/we have a beneficial long position in the shares of PLTR, PYPL, AMZN, GOOGL, CRWD, DIS, AAPL either through stock ownership, options, or other derivatives. Second, I use several examples to show how share dilution is frustrating but not deadly for investors. This is the case for any IPO. That might seem like a major improvement, but investors should recall that Palantir's net loss was inflated by its direct listing expenses last year. For now, I'm allowing PLTR some room, given their strong value proposition, sticky products and of course their tremendous growth story. However, instead of being frustrated, it's instructive to consider the big picture, over a reasonable amount of time. Therefore, it is aggressively investing in sustaining its position and presenting itself as the only viable military AI option for the democracies intending to withstand the technological advances and espionage threats on them. As such, the fair value per share as mentioned above may not represent the true value since we have yet to account for the potential dilution of RSUs. Since going public as a direct listing in 2020. ) The company is an unquestioned leader in the field of big data analytics. Bulls will argue that the company is offering public and private sector clients a solution that will be invaluable in coming years. The forecasted annual earnings growth over the next year is 67% (which Web2,173,481,929 shares was the fully diluted share count as of DPO and this included outstanding options and RSUs that have not yet vested. A caveat to Palantirs share price and its current projection as shown above has ignored for the accumulated stock-based compensation accruing to 246M of Restricted Stock Units (RSUs) that will be exercised in a projected weighted average vesting period of 3.2 years (166M current, 80M projected from 20222025). Perhaps surprisingly, both PYPL and ADBE have fewer shares outstanding now than earlier, and that's despite being high growth companies. Stock Dilution Risks Investors are not benefiting immediately from Palantirs growth as earnings are diluted. Despite the long SBC and share dilution are annoying. Over the last couple of months, shares mostly traded in the low $20s, which values the company at around $40 billion. Furthermore, as earnings legitimately start to appear, without adjustment, investors will be able to better assess the situation. And, as long as growth is far greater than dilution, everything should work out fine. 2023 InvestorPlace Media, LLC. Palantir's cash flow statement for the most recent quarter looks like this: Operating cash flows turned positive, at $120 million, which was a steep improvement over the previous year's quarter. It also announced it would accept payment in. However, these options will eventually be exercised, diluting the existing shareholder structure and lowering the share price in the future. The fair value per share of the company will go up by twofold (representing a 2x return for shareholders) (Fig 9). Today, data is the Holy Grail around the globe, and this demand has turned the data analytics business into one of the most demanding ones in todays time. In turn, banks will respond by strengthening their compliance programs. It has a powerful A.I. InvestorPlace - Stock Market News, Stock Advice & Trading Tips. Palantir has several positives that aren't even disputed by most bulls, e.g. As costs fall and revenues rise, its quality score will improve. It's fair to say that I am one of the biggest Palantir (NYSE:PLTR) bulls on Seeking Alpha. Uber, Lucky you got in in September. In the last quarter, Palantir reported a 37% year-over-year (YOY) increase in commercial revenue. This will help the company offer governments the option to identify compliance issues with banks. On the other hand, CRM increased share count rather substantially and didn't quite make it over 300% price appreciation. Backtested performance is not an indicator of future actual results. Its balance sheet thus looks pretty strong, with cash clearly outsizing any debt. Second, their market cap is $45B not 14.5, which already takes into account the locked shares. However, this secretive software firm that counts the CIA and FBI among its list of eminent clients has been quite a volatile and polarizing investment option since its listing. Here's what PLTR is saying about their growth over the next several years. (See Analysts Top Stocks on TipRanks). Of course, revenue growth of 30% for the next several years is impressive. Last but not least, the share price gets influenced positively thanks to the impact on the supply-demand situation of shares on the market. Following which, we can identify that Palantir will be growing at a 32.9% CAGR from US$1.5B in FY21 to US$8.4B in FY27 (hitting the target of US$5B at FY25 too). Article printed from InvestorPlace Media, https://investorplace.com/2021/11/palantir-might-be-worth-the-buy-for-patient-investors/. The next target multiple will be 1020x, comprising of large systems integrators and enterprise AI companies such as IBM, Cognizant, etc), (2) 60x 3040% y-o-y growth (where Palantir is currently priced at), (3) 100x 50% y-o-y growth (evidenced by how DocuSign and Datadog are valued as they experience such high growth rates). Within the first nine months of 2021, the companys number of weighted average shares has increased by 165% year-over-year. I am not receiving compensation for it (other than from Seeking Alpha). Investors are not benefiting immediately from Palantirs growth as earnings are diluted. I have also generated over $30 million in online sales through my own business activities, along with several million dollar producing partners and affiliates. Not really. Due to the fact that a high-growth company also has many As long as management grows the company faster than it dilutes shareholders, the stock will outperform the index. The amount of drag is dictated by a combination of dilution and growth. When they realize how big an ROI Palantirs solutions offer, related government agencies will try Palantirs products. Here's how their share counts look over the last five years or so: Obviously CRM is diluting; up 51%. 18 of those deals were valued at $10 million or more. PLTR stock already tripled since its initial public offering. Someone else is enjoying the rewards. The company is an unquestioned leader in the field of big data analytics. *Average returns of all recommendations since inception. For the bull case, we will assume a 50% y-o-y growth, ceteris paribus resulting in a US$8B/14B revenue in FY25/27 respectively. (Cognitive Computing) Palantir scores a 41/100 on quality. The averagePalantir Technologies price targetof $23.14 implies 25.4% upside potential. However, I need to point out a few things. First, consider price to sales ratios for CrowdStrike (CRWD), Fortinet (FTNT), PLTR and Snowflake (SNOW). I appreciate your feedback, comments and questions. Instead, it's a drag. As noted earlier, Palantir trades at unfavorable valuations including a high price/sales. Best-of-breed growth stock ideas targeting oversized returns. Intuitively, we don't like it, but it's hard to see at a glance. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. Currency in USD Follow 2W 10W 9M 6.96 -0.05 (-0.71%) At close: January 13 04:00PM EST 6.94 -0.02 (-0.29%) At 150x forward earnings, and at around 30x net revenues, PLTR is far from a cheap stock. As such, an entry into Palantir could be wise in the US$1921 region and initiating covered call positions (up to 90 days out) since movement of the share price will likely be very muted till the release of every quarterly financial results to review the companys growth potential and cost structure. On the other, bears are not wrong to criticize Palantir's cash-burning problem and excessive stock-based compensation, which keeps diluting shareholders to oblivion. Backtested results are adjusted to reflect the reinvestment of dividends and other income and, except where otherwise indicated, are presented gross-of fees and do not include the effect of backtested transaction costs, management fees, performance fees or expenses, if applicable. Disclosure: At the time of publication, Hashtag Investing did not have a position in any of the securities mentioned in this article. However, growth across its government and commercial businesses has slowed significantly, and an uncertain macro environment makes meaningful near-term reacceleration much more diffi, Its Been Determined These 30 Tv Shows Are Being Discontinued For 2023, (Bloomberg) -- Billionaire entrepreneur and investor Peter Thiel, whose data analytics company Palantir Technologies Inc. is vying for a 480 million ($595 million) National Health Service data contract, has described British peoples affection for the state-backed health service as Stockholm syndrome. Most Read from BloombergApple Delays AR Glasses, Plans Cheaper Mixed-Reality HeadsetMicrosoft to Cut Engineering Jobs This Week as Layoffs Go DeeperIndias Population Has Already Overtaken China. Second, mobility is growing in the automotive sector. Further, the new equity value will be divided across the new total number of shares, representing the true fair value per share of the company (Fig 7). I have generated over well over 100% gains many times following a proven growth stock method championed by investors like Peter Lynch, Richard Koch, and Phil Fisher. Palantir is structured to rob investors and their mission is a lie despite all of Karps fancy language about ontological domains. Share dilution from 244 million at IPO to 1.6 billion. For example, after the Q2 2021 Earnings Call, I wrote: Stock based compensation increased. Meanwhile, queasier investors should stick with more inflation-resistant tech stocks trading at more reasonable valuations. If we look forward, analysts expect the company to stay unprofitable for at least the next two years. No representations and warranties are made as to the reasonableness of the assumptions. Therefore, to grab on maximum opportunities, Palantir is aggressively maximizing the quality of its products along with building strong sales teams and entering intopartnershipswith large global giants like International Business Machines (IBM). Since one of the key issues that some investors have with Palantir is its ongoing stock dilution due to many shares being issued to management and employees, the question of eventual share repurchases could be an important one for Palantir's value creation on a per-share basis. Buyer Beware! At the same time, however, cash flows are not overly huge relative to how the company is valued, and even if all operating cash flows were diverted to share repurchases, the company would only manage to buy back around 1% of its shares per year -- less than the rate at which its share count has risen so far. This is all very rough, of course. Making the world smarter, happier, and richer. I do much more than just articles at Growth Stock Renegade: Members get access to model portfolios, regular updates, a chat room, and more. We must not let PLTR off the hook. Palantir, which builds data analysis software for government agencies and large corporations, said on Monday that it has 2.17 billion diluted shares. Eng, Go to company page To determine Palantirs fair value in its share price, we will use the Discounted Cash Flow (DCF) method, discounting Palantirs future cash flows of up to FY27. Third, there's a good reason for SBC and therefore share dilution. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. Ultimately, I believe that the value of the shares is fairly priced (or even slightly overpriced) and the catalysts will definitely be reliant on (1) revenue growth, and (2) stock-based compensation payout as % of the companys cost structure. Palantir Technologies Inc. stock rises Monday, outperforms market Jan. 9, 2023 at 5:18 p.m. Theres likely a few reasons for Palantir to favour SBC over salary. Its stock remains expensive relative to its sales, The mature software stocks trade at a bigger market capitalization and have slower growth. Drag is dictated by a combination of dilution and growth growth is far greater than dilution, should! Sales ratios for CrowdStrike ( CRWD ), PLTR and Snowflake ( SNOW ) about. ( You are fully protected by Seeking Alpha will happen, and that 's a view in last... Is mentioned in this article footnotes: `` excludes stock-based compensation and related employer payroll.... Historical numbers are consolidated from FY18 to FY20 and projections are conducted from FY21 to FY27 company offer the..., e.g stock Advice & Trading Tips assess the situation their growth over the price... 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