Palantir: Cathie Wood Sells, Maybe Buffett Will Buy

seekingalpha2022-03-04

SummaryPalantir’s stock has fallen to fair value territory.Palantir is a Buffett worthy stock with a moat and growing cash flow.Our conservative forecast yields a target price $14,77.Thesis ...

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Comments

Guardian_J
2022-03-08
Guardian_J
Good long term
荷马先生
2022-03-05
荷马先生
what is SG&A expense
LEECS
2022-03-04
LEECS
[Happy]
LEECS
2022-03-04
LEECS
[Happy]
MaxChua
2022-03-04
MaxChua
Stupid article... ridiculous to say buffett will buy it.... Click bait article
LimLS
2022-03-04
LimLS
Buffet won't buy businesses that he don't understand. He had repeated that so many time. It took him so long before he actually bought Apple which is one of the best businesses around. He did not buy earlier because he just don't understand it. So let's put aside Palantir earnings or growth. What is the chances that Buffet understand this business and buy it? Up to readers to decide.

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(PLTR) is an innovative company, which has been touted by growth investors like Cathie Woods for its great technology. However, I see in Palantir something closer to a Buffett style stock. Palantir possesses many of the characteristics that the oracle of Omaha looks for in his investments. At today's price, Palantir is at worst fairly valued, which gives ample margin of safety.Palantir has a MoatOne very compelling reason to own Palantir is the fact that the business is well insulated from competition. I find this to be the case for three reasons.Firstly, the company's technology is way ahead of its peers. Foundry and Gotham's data analytics capabilities are best-in-class, and they get better the more they are used and the more data is collected. This is what has allowed Palantir to gain such important government contracts.Secondly, the nature of how Palantir does business makes the relationship with its customers sticky. Palantir doesn't simply deploy a one size fits all software solution. The company has engineers working side by side with its clients to address each project and use case. As I've talked about in previous articles, Palantir is similar in this way to a consulting company. This has its disadvantages, sure, but it also creates long-lasting relationships and sticky revenues.Lastly, Palantir's main clients are government agencies, which also makes for a steady stream of revenues, and the more they use Palantir, the more dependent they are on it.Proof of these last two points can be found in the growth in value in government contracts, and net dollar retention.Government momentum (Investor Presentation) Source:Investor PresentationBalance Sheet and Cash FlowsPeople often complain about Palantir's high stock-based compensation, but this has allowed Palantir to have a really strong balance sheet even without turning a profit. Palantir has over $2.5 billion in cash and only $260 million in debt. Furthermore, it has a current and quick ratio of over 4. Palantir has plenty of cash and is operating close to break-even. In an environment where rates are rising, a company without a big reliance on debt becomes more attractive.Most importantly though, Palantir has seen strong cash flow growth in 2021.Cash flow/growth comparison (Investor Presentation) Source:Investor PresentationWith revenue growth of 41%, and a cash flow margin of 28%, Palantir looks like a compelling investment when compared to peers. Palantir's profitability is hurt by SBC, but this is a cost that can be wound down. Operating margins are positive and growing, and it is easy to forecast profitability in Palantir's future.Forecast and ValuationNow I am going to walk through a valuation for Palantir based on a 10-year forecast, which is based on yearly figures from 2018 to 2021. We will use the forecast to determine earnings per share in 10 years, and based on growth and balance sheet solidity, we will estimate a price to earnings ratio to complete a forecasted price. The price will be discounted to obtain our target price for the present.We use a discount rate based on the likelihood of the forecast. This depends on the smoothness of the trends we use to make the forecast, and how much growth is needed to achieve it. If the forecast is based on irregular trends that make the future harder to predict and it implies a lot of growth, making it harder to achieve, we will require a better return and therefore use a higher discount rate.Palantir's revenue has evolved very smoothly over the four years in question. The revenue growth has followed a polynomial trend, meaning the growth in absolute terms is higher each year, but the growth rate falls as the revenue grows. This is the most common pattern for relatively young high-growth companies.Revenue (Author's work) Source: Author's work. Items in $millions.The revenue predicted by this trend is approximately $14.5bn by 2031, as you can see in the chart above.The next thing we are looking at is the cost items. These are divided into cost of revenues, SG&A expense and R&D expense. The first, cost of revenues, is the most optimistic part of this forecast. This is because the most fitting trend for how much this cost is relative to revenue is logarithmic. This means that the relative cost should fall as revenue grows. You can see this in the chart below:Cost of Revenue (Author's work) Source: Author's work. Items in $millions.A similar thing happens when you look at SG&A expenses, although in this case, the trend is closer to a linear one:SG&A (Author's work) Source: Author's work. Items in $millions.And finally, we have R&D expenses. These follow a weak linear trend:R&D (Author's work) Source: Author's work. Items in $millions.As you can see, while the revenue is smooth, the trends related to costs are weaker. This means the earnings forecast loses some degree of confidence and this will affect the discount rate we apply to the valuation. You can see here the complete forecast for the operating income figures in 1, 5 and 10 years.Forecast (Author's work) Source: Author's work. Items in $millions.The next point is the balance sheet. Without going into every single detail, I want to illustrate how we forecast the net invested capital will behave about sales in the future. Net invested capital is the sum of all assets that are not cash or financial investments, minus all liabilities which are not debt.So far, this item has evolved in an almost linear relation with revenue. This is what we are going to assume for the next few years. You can see this relation in the chart below.NIC (Author's work) Source: Author's work. Items in $millions.To complete the summarized balance sheet, we are assuming that there will continue to be no dividend and earnings will be accumulated into equity. Soon, we assume the company will also continue to increase its number of shares while this is necessary to maintain a similar relation between equity and sales volume. Here is our forecast for the basic balance sheet items:Forecast (Author's work) Source: Author's work. Items in $millions or millions of shares.You can see that we are predicting that as it has done now, Palantir will require relatively little investment, and will hold an extremely secure balance sheet, with insignificant debt and plenty of cash and financial investments.Finally, we are going into the actual valuation. Although our forecasting method has a little more to it, I have explained the most important points for this particular company. Now it is time to go into the actual valuation. With an EPS figure of $2.24 in 2031, a PE ratio of 27, and a discount rate of 15%, we value PLTR shares at $14.77 today.Valuation (Author's work) Source: Author's workFor estimating the PE ratio, we take into account that debt will be negative and in a significant amount. The sales growth at that point, according to our forecast, should be around 14% at that point. These two elements will drive the PE ratio higher than the average.The discount rate is affected by the amount of growth we are assuming for the next 10 years, with a 25% CAGR over the whole period, and also by the fact that some of the trends we used to make the forecast were weaker than one would like. Overall, we are applying a 15% discount which is higher than average market returns.ConclusionAll in all, Palantir seems to be trading somewhat below fair value. This provides investors with a fair margin of safety. The scenario laid out below is conservative, and Palantir could surprise investors with more explosive growth. But even if it doesn't, at this price Palantir is a value stock that even Warren Buffet could be interested in.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9038974439,"gmtCreate":1646728553636,"gmtModify":1676534155756,"author":{"id":"3577512169946317","authorId":"3577512169946317","name":"Guardian_J","avatar":"https://static.tigerbbs.com/d5732d3790ba7ded4910ae093423ed15","vip":1,"crmLevel":6,"crmLevelSwitch":1},"htmlText":"Good long term","listText":"Good long term","text":"Good long term","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9038974439","repostId":1179022083,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":632671532,"gmtCreate":1646409940141,"gmtModify":1676532800722,"author":{"id":"3570605047103152","authorId":"3570605047103152","name":"荷马先生","avatar":"https://static.tigerbbs.com/1d69283377af06639e7c3544aa273e68","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"what is&nbsp;SG&amp;A expense","listText":"what is&nbsp;SG&amp;A expense","text":"what is SG&A expense","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/632671532","repostId":1179022083,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"CN"},{"id":9031919997,"gmtCreate":1646407987350,"gmtModify":1676534126897,"author":{"id":"3573287623898907","authorId":"3573287623898907","name":"LEECS","avatar":"https://static.tigerbbs.com/475fe88e04a384a1f7346b28d7d85068","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"[Happy]&nbsp;","listText":"[Happy]&nbsp;","text":"[Happy]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9031919997","repostId":1179022083,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9031919073,"gmtCreate":1646407974850,"gmtModify":1676534126895,"author":{"id":"3573287623898907","authorId":"3573287623898907","name":"LEECS","avatar":"https://static.tigerbbs.com/475fe88e04a384a1f7346b28d7d85068","vip":1,"crmLevel":1,"crmLevelSwitch":0},"htmlText":"[Happy]&nbsp;","listText":"[Happy]&nbsp;","text":"[Happy]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9031919073","repostId":1179022083,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9031014719,"gmtCreate":1646384146861,"gmtModify":1676534124439,"author":{"id":"4093050850756480","authorId":"4093050850756480","name":"MaxChua","avatar":"https://community-static.tradeup.com/news/f61000455dd48391a0104f98f3b75686","vip":1,"hat":"https://static.tigerbbs.com/b0a2963eb37c60c5d6d4a8dbcd266952","crmLevel":9,"crmLevelSwitch":1},"htmlText":"Stupid article... ridiculous to say buffett will buy it.... Click bait article","listText":"Stupid article... ridiculous to say buffett will buy it.... Click bait article","text":"Stupid article... ridiculous to say buffett will buy it.... Click bait article","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9031014719","repostId":1179022083,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9031030094,"gmtCreate":1646377879375,"gmtModify":1676534123956,"author":{"id":"3572923586954779","authorId":"3572923586954779","name":"LimLS","avatar":"https://static.tigerbbs.com/217b03b0c4808fb537070ba4e8f9d83f","vip":1,"crmLevel":5,"crmLevelSwitch":1},"htmlText":"Buffet won't buy businesses that he don't understand. He had repeated that so many time. It took him so long before he actually bought Apple which is one of the best businesses around. He did not buy earlier because he just don't understand it. So let's put aside Palantir earnings or growth. What is the chances that Buffet understand this business and buy it? Up to readers to decide.&nbsp;","listText":"Buffet won't buy businesses that he don't understand. He had repeated that so many time. It took him so long before he actually bought Apple which is one of the best businesses around. He did not buy earlier because he just don't understand it. So let's put aside Palantir earnings or growth. What is the chances that Buffet understand this business and buy it? Up to readers to decide.&nbsp;","text":"Buffet won't buy businesses that he don't understand. He had repeated that so many time. It took him so long before he actually bought Apple which is one of the best businesses around. He did not buy earlier because he just don't understand it. So let's put aside Palantir earnings or growth. What is the chances that Buffet understand this business and buy it? Up to readers to decide.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9031030094","repostId":1179022083,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":204,"commentSize":35,"repostSize":0,"favoriteSize":5,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1179022083"}