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侯根旺
2021-06-11
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How Much Is Palantir Worth?
侯根旺
2021-06-11
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Palantir: The Good, The Bad And The Ugly
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2021-06-11
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We detail our full valuation model.</li></ul><p>Oneof our fewand our highest conviction tech investments, Palantir(NYSE:PLTR)has a wide moat Gotham (government) business and its Foundry (commercial) business has massive growth potential. Despite posting fat adjusted gross margins, the company continues to forego GAAP profitability today in order to invest aggressively for the long term.</p><p>What are PLTR shares worth today? In the following sections, we will attempt to give an estimate.</p><p><b>1. Qualitative Analysis</b></p><p>For a more thorough appraisal of the qualitative aspects of PLTR, please check out ourfull investment thesis. That said, in order to provide the proper context for our quantitative assumptions and analysis we will briefly outline our qualitative appraisal of the company here:</p><ul><li><i>Strong Government-Backed Moat</i></li></ul><p>PLTR's high-quality data analytics and artificial intelligence Gotham platform combine with its decades of successful partnership with US and US-aligned government agencies to give it a very strong competitive standing for winning additional government projects. As Big Data and A.I. grow in importance for national security in the years to come, we expect PLTR's share of the pie of government spending to only increase.</p><p>In fact, itsQ1 resultsshowed exactly that with total government revenue surging by 76% year-over-year and US government business growing by an even faster 83%.</p><p><img src=\"https://static.tigerbbs.com/76849a1437b60ad615d46d63da06e109\" tg-width=\"627\" tg-height=\"621\" referrerpolicy=\"no-referrer\"><i>source</i></p><p>The contracts it is winning include a 5-year contract worth up to $90 million to help protect and manage the U.S. nuclear stockpile, powering all 11 DoD combatant commands for major exercises, servicing other major defense contractors, and - most recently -expanding its Space Force partnership.</p><p>This robust growth should continue for the foreseeable future as their total government revenue is less than 10 basis points of total US defense spending and senior US government personnel remain thrilled with their product. As Space Force Colonel Krolikowski stated in the wake of the expanded Space Force partnership:</p><blockquote><i>I’m excited about this partnership and the work we are doing to provide better data-driven decision making to our leadership. Palantir’s technology and framework has truly accelerated our ability to remove data stovepipes throughout the community and create actionable knowledge</i></blockquote><ul><li><i>Accelerating Foundry Growth</i></li></ul><p>PLTR's other major platform - Foundry - is seeing accelerating growth in its pursuit of commercial contracts and it is investing aggressively in ensuring that momentum continues. In fact, PLTR expects that their Foundry business may one day become their largest source of revenue.</p><p>In Q1, US commercial revenue grew by 72% and overall revenue grew by 49% year-over-year fueled by 11 new commercial customers coming on board and 29% growth in revenue per customer. Q2 should see similarly strong growth, with management forecasting 43% year-over-year growth with 30%+ annual growth expected through 2025 as management is pursuing multiple strategic growth initiatives:</p><p>(1) Afree Foundry trialfor select companies to assist them with re-opening after COVID-19 and hopefully win their long-term business.</p><p>(2) Investing heavily in growing and enhancing their sales team by adding nearly 50 sales personnel in Q1 with the expectation of growing by over 100 by year-end.</p><p>(3) Buying equity in some of its smaller clients that it believes will be long-term winners while also creating a symbiotic relationship with them.</p><p>(4)Exploringways to play a role with Bitcoin and the broader emergence of cryptocurrency.</p><p>(5) Adapting their product and marketing to attract a wider range of businesses, thereby boosting their qualified pipeline by 2.5 times in the U.S. and U.K.</p><ul><li><i>Solid Balance Sheet</i></li></ul><p>With billions of dollars in cash on the balance sheet, minimal debt, and adjusted free cash flow positive, PLTR is well-capitalized and sufficiently liquid to continue investing aggressively in its growth initiatives.</p><ul><li><i>Strong Brain Trust</i></li></ul><p>Operating in a space where technical and innovative capabilities are the name of the game, PLTR is well-positioned to win given its ability to attract and retain the best and brightest minds in the industry.</p><p><b>2. Quantitative Analysis</b></p><p>Now that we have established that PLTR is a high-quality company in virtually every respect with strong growth momentum and a lengthy runway, let's dig into numbers to see if we can get a sense of how much it is actually worth.</p><p>The company is currently valued at an enterprise value of $38.4 billion as its market cap of $40.3 billion includes a substantial net cash position. The company is expected to generate ~$1.5 billion in revenue in 2021 and just over $1.9 billion in 2022. Meanwhile, its EBITDA is expected to come in at $363.2 million in 2021 and $508.3 million in 2022. By 2025, PLTR has an announced goal of achieving $4 billion in revenues.</p><p><img src=\"https://static.tigerbbs.com/d5ac0eb66cdb91fcbb57a41107924119\" tg-width=\"448\" tg-height=\"203\" referrerpolicy=\"no-referrer\"><i>source</i></p><p>They view their total addressable market as currently being ~$119 billion and we expect this to grow rapidly as the quantity and role of data and A.I. are increasing quickly and PLTR continues to invest in developing new capabilities which should expand its sphere of addressable operations over time.</p><p>Their government and commercial addressable markets are both roughly equivalent, and the U.S. government total addressable market is a whopping $26 billion currently. Given that we believe their US government business is by far their strongest, this is an important number for us to latch onto in our projections.</p><p>We believe that the US will continue to place an ever-increasing amount of trust in PLTR as it desperately strives to defeat China in the A.I. race over the next several decades. Seeing that PLTR has already won some extremely important contracts with the US government, we expect them to be the odds-on favorites to win a large portion of the US total addressable market in the years to come.</p><p>While we are optimistic that they will capture at least 25% of their current total addressable market from the U.S. government by the end of the decade and will see solid growth in their other business opportunities, they do face some stiff competition in the commercial space from companies like Microsoft (MSFT) and foreign governments - even if US-aligned - may be somewhat cautious of linking their critical government agencies to a US company.</p><p>As a result, we see them capturing a more conservative 5% of current total addressable market in each of these categories over the next decade (which is quite conservative given that these total addressable markets will likely grow significantly during that span). In fact, the global big data market isexpected to growat a CAGR of 22.4% through 2030, with the North American big data market expected to grow at a 15.6% CAGR and Europe's big data market expected to grow at a CAGR of 19.1%, so they would only need to capture only a few percentage points of the total addressable market at that point to reach $10+ billion in revenue.</p><p>Using these assumptions means that we expect their revenue to grow from ~$1.5 billion at year-end 2021 to ~$11 billion by the end of 2030. While this might sound ludicrous, we see little reason to expect their growth rate to slow after this year as they are making aggressive investments in their business and are only now starting to really ramp up their sales team while also partnering with vaunted sales teams at companies like IBM (IBM) and with Amazon's (AMZN) Web Services business to facilitate growth. To reach $11 billion by the end of 2030, they would only need to grow at an annualized 25% rate, which we believe is very doable given their aforementioned strengths and initiatives, particularly in the US government business, along with the fact that they are likely to not pay out any dividends or buy back shares over that period and instead continue investing aggressively in their business.</p><p>Now that we have arrived at a revenue number, let's look at the profitability potential.</p><p>PLTR demonstrated during Q1 that its operating profitability is improving rapidly. During Q1, they generated earnings-per-share of $0.04 as the adjusted gross margin expanded by 800 basis points year-over-year to 83% and the contribution margin soared by 1900 basis points to 60%.</p><p>As a result, adjusted operating income improved $133 million year-over-year, coming in at $117 million in Q1 2021 (adjusted operating margin of 34%). Adjusted free cash flow was $151 million in Q1, good for a 44% adjusted free cash flow margin.</p><p>While these numbers look fantastic as a 34% adjusted operating margin would imply ~$3.75 billion in operating income by 2030 which, given that they will likely still be growing by 20%+ annually at that point under our assumptions, would likely warrant a multiple of ~50x (depending on interest rates and overall macroeconomic conditions). As a result, the company would conservatively be worth ~$190 billion by 2030, making it a near 5x over the next 9 years (which would represent a ~20% CAGR to 2030). Under this assumption, PLTR should be worth an enterprise value of ~$85 billion today (which would represent a 9%-10% CAGR to 2030), which would put the shares at a fair value of between $45 and $50 today.</p><p>However, this model overlooks one major negative factor that makes the adjusted free cash flow numbers misleading: stock-based compensation. While we do not take issue with this management practice given that it is being used to attract and retain the best talent in the industry without draining the company's cash pile that it needs to invest aggressively to win long-term in the space, it is still important to account for its impact when modeling the company's valuation.</p><p>In Q1 2021, stock-based compensation and employer payroll taxes related to stock-based compensation totaled a whopping ~$230 million. While this figure will likely grow to some degree as the company continues to grow and add payroll, it will ultimately decline as a percentage of the total revenues as the company continues to grow. Stock-based compensation currently accounts for ~2.3% of the company's total equity valuation and we expect this to decline over time as the company will likely grow faster than its payroll.</p><p>Therefore, through 2030, we conservatively estimate average annual dilution of ~1.5% from stock-based compensation and estimate it will be at $2 billion annually by 2030. This would leave GAAP operating income at just $1.75 billion in 2030, and, at a 50x multiple would imply the company would be worth just $87.5 billion at that point, making it a mere 2.3x from its present value. Adding in the dilutive impact of 1.5% annualized stock-based compensation and the estimated per-share value in 2030 would be $44, making it a double over a 9-year period (i.e., just a mediocre ~8% CAGR).</p><p>As a result, it is reasonable to conclude that shares are currently fairly valued. However, at the same time, it is important to realize that there are two factors that will significantly impact this assessment:</p><p><i>(1) Operating Margin:</i>The company has significant momentum in improving its operating margins. As they continue to scale rapidly, there is a strong likelihood that operating margins will improve further. Of course, competition will also increase, so there will be pressure on gross margins. Ultimately, we expect them to reach an adjusted operating margin of 40% as rapid scaling should more than offset competitive pressures, especially in their government business, which should enjoy fatter margins than their narrower moat commercial business. This 600 basis point improvement alone would raise their estimated 2030 valuation by a whopping 37% and push their expected shareholder CAGR firmly into the double digits.</p><p><i>(2) Growth Rates:</i>We used somewhat conservative growth rate assumptions in our model as we do not want to bank on their commercial business becoming a powerhouse given that competition is likely to be stiff.</p><p>That said, all of that stock-based compensation is going towards attracting and retaining some of the brightest data analytics, machine learning, and software engineering minds, which should not be underestimated. As a result, we would not be shocked at all to see them gain better headway in the commercial market than our initial model assumes and therefore significantly outperform their 2025 and our 2030 revenue estimates.</p><p>While it is true that it is easier to sustain a high growth rate at their current (relatively) small size and that the bigger you scale the harder it is to sustain that growth rate, we also know that they are only know really trying to scale their sales team, they are reinvesting aggressively into their business, and the role of data, machine learning, and software is likely to explode exponentially in the coming decade, providing a massive tailwind to their growth.</p><p>While we assume a 25% annualized growth rate through 2030 from the present, if they can simply increase that to 30%, their revenue will be closer to $16 billion, which in turn would likely lead to even higher operating margins and immensely higher operating income, making their stock-based compensation even a smaller portion of the pie and their upside potential immensely higher than it is perceived to be today.</p><p>Of course, the downside risk is that their Foundry platform will fail to make any significant headway in the private sector, leading to dramatically declining growth rates and them having to continue leaning heavily on their government business. Such a scenario would lead to mediocre total returns as their revenue would likely only end up in the $8 billion range and - though their stock-based compensation would obviously be lower as well - their operating income would probably wind up being ~$1.5 billion, making the company worth only $75 billion, or presenting a mere mid-single digit CAGR through 2030 which would make it a rather unappealing comparative investment.</p><p><b>Investor Takeaway</b></p><p>PLTR is a great company and is very likely to remain a mission-critical component of US government technical infrastructure for the foreseeable future. That alone gives the business significant stability concerning its future and will likely lead to strong growth.</p><p>However, stock-based compensation and lingering uncertainty about the long-term competitive strength of its Foundry platform are the main overhangs weighing on the stock right now. While we believe that the former overhang is a major key to positively resolving the latter uncertainty, only time will tell.</p><p>Based on our assumptions of 25%+ annualized revenue growth through 2030, 40% adjusted operating margins in 2030, and $2 billion in 2030 stock-based compensation, we expect the company to be worth at least 3x what it is today and generate ~12%-13% annualized returns over that period, making it a buy today and a strong buy at $20 or less.</p>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>How Much Is Palantir Worth?</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nHow Much Is Palantir Worth?\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-05-28 13:18 GMT+8 <a href=https://seekingalpha.com/article/4431750-how-much-is-palantir-worth><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummaryPLTR has a wide moat Gotham business, and its Foundry business has massive growth potential.The company continues to forego GAAP profitability today in order to invest aggressively for the long...</p>\n\n<a href=\"https://seekingalpha.com/article/4431750-how-much-is-palantir-worth\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"PLTR":"Palantir Technologies Inc."},"source_url":"https://seekingalpha.com/article/4431750-how-much-is-palantir-worth","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1157072297","content_text":"SummaryPLTR has a wide moat Gotham business, and its Foundry business has massive growth potential.The company continues to forego GAAP profitability today in order to invest aggressively for the long term.What are PLTR shares worth today? We detail our full valuation model.Oneof our fewand our highest conviction tech investments, Palantir(NYSE:PLTR)has a wide moat Gotham (government) business and its Foundry (commercial) business has massive growth potential. Despite posting fat adjusted gross margins, the company continues to forego GAAP profitability today in order to invest aggressively for the long term.What are PLTR shares worth today? In the following sections, we will attempt to give an estimate.1. Qualitative AnalysisFor a more thorough appraisal of the qualitative aspects of PLTR, please check out ourfull investment thesis. That said, in order to provide the proper context for our quantitative assumptions and analysis we will briefly outline our qualitative appraisal of the company here:Strong Government-Backed MoatPLTR's high-quality data analytics and artificial intelligence Gotham platform combine with its decades of successful partnership with US and US-aligned government agencies to give it a very strong competitive standing for winning additional government projects. As Big Data and A.I. grow in importance for national security in the years to come, we expect PLTR's share of the pie of government spending to only increase.In fact, itsQ1 resultsshowed exactly that with total government revenue surging by 76% year-over-year and US government business growing by an even faster 83%.sourceThe contracts it is winning include a 5-year contract worth up to $90 million to help protect and manage the U.S. nuclear stockpile, powering all 11 DoD combatant commands for major exercises, servicing other major defense contractors, and - most recently -expanding its Space Force partnership.This robust growth should continue for the foreseeable future as their total government revenue is less than 10 basis points of total US defense spending and senior US government personnel remain thrilled with their product. As Space Force Colonel Krolikowski stated in the wake of the expanded Space Force partnership:I’m excited about this partnership and the work we are doing to provide better data-driven decision making to our leadership. Palantir’s technology and framework has truly accelerated our ability to remove data stovepipes throughout the community and create actionable knowledgeAccelerating Foundry GrowthPLTR's other major platform - Foundry - is seeing accelerating growth in its pursuit of commercial contracts and it is investing aggressively in ensuring that momentum continues. In fact, PLTR expects that their Foundry business may one day become their largest source of revenue.In Q1, US commercial revenue grew by 72% and overall revenue grew by 49% year-over-year fueled by 11 new commercial customers coming on board and 29% growth in revenue per customer. Q2 should see similarly strong growth, with management forecasting 43% year-over-year growth with 30%+ annual growth expected through 2025 as management is pursuing multiple strategic growth initiatives:(1) Afree Foundry trialfor select companies to assist them with re-opening after COVID-19 and hopefully win their long-term business.(2) Investing heavily in growing and enhancing their sales team by adding nearly 50 sales personnel in Q1 with the expectation of growing by over 100 by year-end.(3) Buying equity in some of its smaller clients that it believes will be long-term winners while also creating a symbiotic relationship with them.(4)Exploringways to play a role with Bitcoin and the broader emergence of cryptocurrency.(5) Adapting their product and marketing to attract a wider range of businesses, thereby boosting their qualified pipeline by 2.5 times in the U.S. and U.K.Solid Balance SheetWith billions of dollars in cash on the balance sheet, minimal debt, and adjusted free cash flow positive, PLTR is well-capitalized and sufficiently liquid to continue investing aggressively in its growth initiatives.Strong Brain TrustOperating in a space where technical and innovative capabilities are the name of the game, PLTR is well-positioned to win given its ability to attract and retain the best and brightest minds in the industry.2. Quantitative AnalysisNow that we have established that PLTR is a high-quality company in virtually every respect with strong growth momentum and a lengthy runway, let's dig into numbers to see if we can get a sense of how much it is actually worth.The company is currently valued at an enterprise value of $38.4 billion as its market cap of $40.3 billion includes a substantial net cash position. The company is expected to generate ~$1.5 billion in revenue in 2021 and just over $1.9 billion in 2022. Meanwhile, its EBITDA is expected to come in at $363.2 million in 2021 and $508.3 million in 2022. By 2025, PLTR has an announced goal of achieving $4 billion in revenues.sourceThey view their total addressable market as currently being ~$119 billion and we expect this to grow rapidly as the quantity and role of data and A.I. are increasing quickly and PLTR continues to invest in developing new capabilities which should expand its sphere of addressable operations over time.Their government and commercial addressable markets are both roughly equivalent, and the U.S. government total addressable market is a whopping $26 billion currently. Given that we believe their US government business is by far their strongest, this is an important number for us to latch onto in our projections.We believe that the US will continue to place an ever-increasing amount of trust in PLTR as it desperately strives to defeat China in the A.I. race over the next several decades. Seeing that PLTR has already won some extremely important contracts with the US government, we expect them to be the odds-on favorites to win a large portion of the US total addressable market in the years to come.While we are optimistic that they will capture at least 25% of their current total addressable market from the U.S. government by the end of the decade and will see solid growth in their other business opportunities, they do face some stiff competition in the commercial space from companies like Microsoft (MSFT) and foreign governments - even if US-aligned - may be somewhat cautious of linking their critical government agencies to a US company.As a result, we see them capturing a more conservative 5% of current total addressable market in each of these categories over the next decade (which is quite conservative given that these total addressable markets will likely grow significantly during that span). In fact, the global big data market isexpected to growat a CAGR of 22.4% through 2030, with the North American big data market expected to grow at a 15.6% CAGR and Europe's big data market expected to grow at a CAGR of 19.1%, so they would only need to capture only a few percentage points of the total addressable market at that point to reach $10+ billion in revenue.Using these assumptions means that we expect their revenue to grow from ~$1.5 billion at year-end 2021 to ~$11 billion by the end of 2030. While this might sound ludicrous, we see little reason to expect their growth rate to slow after this year as they are making aggressive investments in their business and are only now starting to really ramp up their sales team while also partnering with vaunted sales teams at companies like IBM (IBM) and with Amazon's (AMZN) Web Services business to facilitate growth. To reach $11 billion by the end of 2030, they would only need to grow at an annualized 25% rate, which we believe is very doable given their aforementioned strengths and initiatives, particularly in the US government business, along with the fact that they are likely to not pay out any dividends or buy back shares over that period and instead continue investing aggressively in their business.Now that we have arrived at a revenue number, let's look at the profitability potential.PLTR demonstrated during Q1 that its operating profitability is improving rapidly. During Q1, they generated earnings-per-share of $0.04 as the adjusted gross margin expanded by 800 basis points year-over-year to 83% and the contribution margin soared by 1900 basis points to 60%.As a result, adjusted operating income improved $133 million year-over-year, coming in at $117 million in Q1 2021 (adjusted operating margin of 34%). Adjusted free cash flow was $151 million in Q1, good for a 44% adjusted free cash flow margin.While these numbers look fantastic as a 34% adjusted operating margin would imply ~$3.75 billion in operating income by 2030 which, given that they will likely still be growing by 20%+ annually at that point under our assumptions, would likely warrant a multiple of ~50x (depending on interest rates and overall macroeconomic conditions). As a result, the company would conservatively be worth ~$190 billion by 2030, making it a near 5x over the next 9 years (which would represent a ~20% CAGR to 2030). Under this assumption, PLTR should be worth an enterprise value of ~$85 billion today (which would represent a 9%-10% CAGR to 2030), which would put the shares at a fair value of between $45 and $50 today.However, this model overlooks one major negative factor that makes the adjusted free cash flow numbers misleading: stock-based compensation. While we do not take issue with this management practice given that it is being used to attract and retain the best talent in the industry without draining the company's cash pile that it needs to invest aggressively to win long-term in the space, it is still important to account for its impact when modeling the company's valuation.In Q1 2021, stock-based compensation and employer payroll taxes related to stock-based compensation totaled a whopping ~$230 million. While this figure will likely grow to some degree as the company continues to grow and add payroll, it will ultimately decline as a percentage of the total revenues as the company continues to grow. Stock-based compensation currently accounts for ~2.3% of the company's total equity valuation and we expect this to decline over time as the company will likely grow faster than its payroll.Therefore, through 2030, we conservatively estimate average annual dilution of ~1.5% from stock-based compensation and estimate it will be at $2 billion annually by 2030. This would leave GAAP operating income at just $1.75 billion in 2030, and, at a 50x multiple would imply the company would be worth just $87.5 billion at that point, making it a mere 2.3x from its present value. Adding in the dilutive impact of 1.5% annualized stock-based compensation and the estimated per-share value in 2030 would be $44, making it a double over a 9-year period (i.e., just a mediocre ~8% CAGR).As a result, it is reasonable to conclude that shares are currently fairly valued. However, at the same time, it is important to realize that there are two factors that will significantly impact this assessment:(1) Operating Margin:The company has significant momentum in improving its operating margins. As they continue to scale rapidly, there is a strong likelihood that operating margins will improve further. Of course, competition will also increase, so there will be pressure on gross margins. Ultimately, we expect them to reach an adjusted operating margin of 40% as rapid scaling should more than offset competitive pressures, especially in their government business, which should enjoy fatter margins than their narrower moat commercial business. This 600 basis point improvement alone would raise their estimated 2030 valuation by a whopping 37% and push their expected shareholder CAGR firmly into the double digits.(2) Growth Rates:We used somewhat conservative growth rate assumptions in our model as we do not want to bank on their commercial business becoming a powerhouse given that competition is likely to be stiff.That said, all of that stock-based compensation is going towards attracting and retaining some of the brightest data analytics, machine learning, and software engineering minds, which should not be underestimated. As a result, we would not be shocked at all to see them gain better headway in the commercial market than our initial model assumes and therefore significantly outperform their 2025 and our 2030 revenue estimates.While it is true that it is easier to sustain a high growth rate at their current (relatively) small size and that the bigger you scale the harder it is to sustain that growth rate, we also know that they are only know really trying to scale their sales team, they are reinvesting aggressively into their business, and the role of data, machine learning, and software is likely to explode exponentially in the coming decade, providing a massive tailwind to their growth.While we assume a 25% annualized growth rate through 2030 from the present, if they can simply increase that to 30%, their revenue will be closer to $16 billion, which in turn would likely lead to even higher operating margins and immensely higher operating income, making their stock-based compensation even a smaller portion of the pie and their upside potential immensely higher than it is perceived to be today.Of course, the downside risk is that their Foundry platform will fail to make any significant headway in the private sector, leading to dramatically declining growth rates and them having to continue leaning heavily on their government business. Such a scenario would lead to mediocre total returns as their revenue would likely only end up in the $8 billion range and - though their stock-based compensation would obviously be lower as well - their operating income would probably wind up being ~$1.5 billion, making the company worth only $75 billion, or presenting a mere mid-single digit CAGR through 2030 which would make it a rather unappealing comparative investment.Investor TakeawayPLTR is a great company and is very likely to remain a mission-critical component of US government technical infrastructure for the foreseeable future. That alone gives the business significant stability concerning its future and will likely lead to strong growth.However, stock-based compensation and lingering uncertainty about the long-term competitive strength of its Foundry platform are the main overhangs weighing on the stock right now. While we believe that the former overhang is a major key to positively resolving the latter uncertainty, only time will tell.Based on our assumptions of 25%+ annualized revenue growth through 2030, 40% adjusted operating margins in 2030, and $2 billion in 2030 stock-based compensation, we expect the company to be worth at least 3x what it is today and generate ~12%-13% annualized returns over that period, making it a buy today and a strong buy at $20 or less.","news_type":1},"isVote":1,"tweetType":1,"viewCount":225,"authorTweetTopStatus":1,"verified":2,"comments":[],"imageCount":0,"langContent":"EN","totalScore":0},{"id":188389989,"gmtCreate":1623421521641,"gmtModify":1704203287700,"author":{"id":"3568543870812660","authorId":"3568543870812660","name":"侯根旺","avatar":"https://static.tigerbbs.com/b1c36eeb9411b7f3a1f914d3040bb16b","crmLevel":1,"crmLevelSwitch":0,"followedFlag":false,"idStr":"3568543870812660","authorIdStr":"3568543870812660"},"themes":[],"htmlText":"Great ariticle, would you like to share it?","listText":"Great ariticle, would you like to share it?","text":"Great ariticle, would you like to share it?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/188389989","repostId":"1120676282","repostType":2,"repost":{"id":"1120676282","pubTimestamp":1623056015,"share":"https://ttm.financial/m/news/1120676282?lang=&edition=fundamental","pubTime":"2021-06-07 16:53","market":"us","language":"en","title":"Palantir: The Good, The Bad And The Ugly","url":"https://stock-news.laohu8.com/highlight/detail?id=1120676282","media":"seekingalpha","summary":"Summary\n\nPalantir is a company with attractive growth prospects due to a growing need for predictive","content":"<p><b>Summary</b></p>\n<ul>\n <li>Palantir is a company with attractive growth prospects due to a growing need for predictive analytics by government agencies and commercial organizations.</li>\n <li>Despite its entry into the pantheon of meme stocks, its valuation is not overly detached from reality.</li>\n <li>Investors need to rein in the greed itch and wait for an entry point with a decent margin of safety.</li>\n</ul>\n<p>Palantir Technologies (NYSE:PLTR) is a favorite stock of ARK Invest and retail investors who see it as the paragon of stocks with exponential growth potential, trading at deep value. Let's take a look at the good, the bad and the ugly side of Palantir with my cynical lens.</p>\n<p><b>The good</b></p>\n<p>The good thing about Palantir is the growth hype as investors see a very large aura of growth potential around this stock. In the absence of a sky-high price target from a guru like Cathie Wood to anchor hype-based investors, people are dreaming about Palantir as the next $1 trillion market cap company with a juicy 25x upside five years down the road.</p>\n<p>As they say, most myths begin with a kernel of truth. Palantir is a data mining analytics company founded back in 2003 which went public in September 2020. The need for data analytics has exploded as companies and governments attempt to leverage the ever-growing amounts of data being collected continuously. As we enter the Age of Data, Palantir has won over intelligence agencies, governments as well as commercial organizations with its tools to make better decisions.</p>\n<p>To put Palantir's growth trajectory into context, its revenue grew at a 5-year CAGR of 25% between 2015 and 2020 and management is guiding that its revenues will grow at 30%+ over the coming five years. Unlike many other nearly two-decade old companies who would experience a gradually decelerating rate of top-line growth, Palantir expects revenue growth to take off in the coming years.</p>\n<p>In my view, hype is a good thing for a stock, but only as long as it does not become too detached from reality.</p>\n<p><b>The bad</b></p>\n<p>The bad thing about Palantir is obviously the value perspective. Given the recent IPO and large retail following, the bullish thesis on Palantir dismisses the methodical discounted cash flow-based valuation process in favor of a more flexible \"vision-based\" valuation with which unsophisticated investors feel at home.</p>\n<p>On January 17th, Palantir touched an intraday high of $45/share before the reflation trade flattened the uptrend in tech stocks. With Palantir trading at around 47% off its high, seemingly a bargain vs. a few months back, there is no dearth of investors afflicted with the greed itch which makes people believe that it's much less risky to invest than to miss out on investing.</p>\n<p><img src=\"https://static.tigerbbs.com/2c01a9b500ac22c7e2ea4f9985fb9b9d\" tg-width=\"640\" tg-height=\"468\" referrerpolicy=\"no-referrer\"></p>\n<p><b>The ugly</b></p>\n<p>The ugly things about Palantir are the rude awakening faced by investors about share sales by early investors, its highly dilutive employee compensation structure as well as potential ESG issues in the business model.</p>\n<p>Palantir opted for a direct listing (instead of an initial public offering) under which its employees and early investors sold up to 20% of their holdings directly to the public. The remaining 80% holdings were subject to a lock-up which expired three days after Palantir filed its 2020 financial results on Feb 16th. As soon as the lock-up ended, there were sales by early investors (no surprise) which increased the supply of shares in the market, probably pushing the price down somewhat.</p>\n<p>Stock-based compensation (SBC) has been a raw nerve for Palantir ever since it filed its first set of financial statements for 3Q-2020 where it had a large spike in SBC of which $778 million related to 'accelerated attribution' from the direct listing of the company. During 4Q2020 and 1Q2021, SBC remained elevated vs. pre-listing period (see table below) due to what is characterized as 'overhang' by the management which is likely to normalize over the next couple of years.</p>\n<p><img src=\"https://static.tigerbbs.com/05b0d8492dc6f956371882cb199f3a06\" tg-width=\"640\" tg-height=\"156\" referrerpolicy=\"no-referrer\"></p>\n<p>In my view, the main issue is Palantir's excessive reliance on dilutive modes of employee compensation like stock options and restricted stock units. Even if we gloss over the blip in SBC for 2020 which is high due to the impact of listing, Palantir's SBC relative to its revenues was much higher than other tech companies for the past several years (see table below).</p>\n<p><img src=\"https://static.tigerbbs.com/b8a66b247fa56f9377c4f0b61587fd92\" tg-width=\"640\" tg-height=\"195\" referrerpolicy=\"no-referrer\"></p>\n<p>Managements of tech companies keep repeating the mantra that SBC is a non-cash expense (routinely added-back to calculate non-GAAP profitability metrics). However, the end result of SBC is dilution by issuing new shares to employees at dirt cheap prices. Later on in this note, I will show how much value SBC is taking away from investors.</p>\n<p>Another ugly facet of Palantir is itsdubious ESG credentialsbecause of its association with the military-industrial complex via the work it does for US Central Intelligence Agency (\"CIA\"), US Department of Defense (\"DoD\") and US Immigration and Customs Enforcement (\"ICE\"). Without passing any judgement on Palantir's business model or the effectiveness of ESG investment style, I think it's safe to say that an ever-growing section of investment funds allocated based on Ethical, Social and Governance (\"ESG\") principals and its predecessor Socially Responsible Investing (\"SRI\") will not fully embrace a company like Palantir.</p>\n<p><b>The worth of Palantir</b></p>\n<p>Beauty lies in the eye of the beholder. In the same way, the worth of Palantir depends on who is looking to invest in it. A hype-based investor HODL-ing glamour stocks is not likely to take the cumbersome route of projecting future cash flows to see if they make any sense vs. the price being paid today. For such investors the future holds a simple promise that 'There shall be showers of blessing.' On the other hand, a value-based investor will invest in Palantir if she sees its DCF-based intrinsic value substantially higher than the current market price and notices triggers for this value gap to be bridged.</p>\n<p>In my view, the worth (or DCF-based intrinsic value) of Palantir is USD20/share, quite a way below its prevailing market price. Despite its cult-like status in the meme stock hall of fame after the post-listing mad-rush, the valuation is obviously not too overstretched, thanks to the sharp correction.</p>\n<p><img src=\"https://static.tigerbbs.com/4e0e4784d2ce8c40af478fcd8a37e4c1\" tg-width=\"640\" tg-height=\"319\" referrerpolicy=\"no-referrer\"></p>\n<p>I calculate the worth of Palantir as USD20/share based on an explicit cash flow forecast for the next ten years with exponential growth (based on my best-judgement rosy outlook) and a terminal value assuming Palantir matures in ten years and enters a steady state of stable growth.</p>\n<p>Let's unpack the ten-year exponential growth period assumptions. In the first five years, I assume that revenues will grow at an annual growth rate of 30% (per management guidance). From year 6 to year 10, revenue growth gradually tapers offs to an average annual rate of 18% pa.</p>\n<p><img src=\"https://static.tigerbbs.com/268bdff6b275827c80064249dbf785ef\" tg-width=\"640\" tg-height=\"277\" referrerpolicy=\"no-referrer\"></p>\n<p>The favorite profitability metric of Palantir management is Adjusted Operating Margin (which essentially ignores stock-based compensation i.e. Adjusted Operating Profit = EBIT + SBC). For the first year of the exponential growth period, I assumed Adjusted Operating Margin of 23% (management guided to this margin for 2Q-2021 only). From year two onwards, I assumed a gradual expansion in Adjusted Operating Margin thinking that some of the non-SBC costs will be of fixed nature, i.e. Palantir will enjoy some benefit of its growing scale in the form of fixed costs spread out over a bigger revenue base. I've assumed about 9% pt expansion in Adjusted Operating Margin over year two to year ten.</p>\n<p>Some readers with a bearish view could question this assumption as not being realistic. Well, it's just a guess to incorporate potential sticky costs in the analysis although, to be fair, it's next to impossible to quantify the level of stickiness in operating expenses with any degree of accuracy. Nevertheless, there is a clear evidence (see table below) of some sticky costs in the last three years of financial data where the ratio of non-SBC COGS + Opex to revenues has declined with the growth in revenues.</p>\n<p><img src=\"https://static.tigerbbs.com/8fb410b9c18d7d0556aa8db16cd4549e\" tg-width=\"640\" tg-height=\"226\" referrerpolicy=\"no-referrer\"></p>\n<p>The other key assumptions are terminal growth rate and discount rate.</p>\n<p>I've used a terminal growth rate of 3% to grow Palantir's cash flows into perpetuity once it enters a steady state in ten years. Terminal growth rate is a notorious assumption in DCF models. The higher the terminal growth rate assumption, the higher the intrinsic value. This is even more true for Palantir, whose intrinsic value primarily comprises of terminal value while cash flows for the exponential growth period of ten years comprise a very negligible portion of the overall value.</p>\n<p>The discount rate (or Weighted Average Cost of Capital or \"WACC\") is 5.27% derived from CAPM formula. This is the rate that is used to discount the future cash flows to calculate a present value. So unlike a lot of self-taught retail investors who love to assign a target price five years down the road based on valuation multiple, we are moving in the opposite direction by calculating how much the future cash flow stream is worth today and then deciding to buy or sell if the worth today is higher or lower than market price.</p>\n<p><img src=\"https://static.tigerbbs.com/027c8be7a8807317ec42309135a12baa\" tg-width=\"613\" tg-height=\"345\" referrerpolicy=\"no-referrer\"></p>\n<p>How dilutive is stock-based compensation?</p>\n<p>A lot has been said about the dilutive impact of the high level of stock-based compensation offered by Palantir to its employees. However, the big question is how do we factor this impact into the valuation to see if the slumping stock price has already reflected the upcoming hit from exercise of stock options and vesting of restricted stock units.</p>\n<p>To set the stage, I turn to the Dean of Valuation,Prof. Aswath Damodaranto gauge the impact of SBC.</p>\n<blockquote>\n The stock-based compensation may not represent cash but it is so only because the company has used a barter system to evade the cash flow effect. Put differently, if the company had issued the options and restricted stock (that it was planning to give employees) to the market and then used the cash proceeds to pay employees, we would have treated it as a cash expense.\n</blockquote>\n<p>According to Prof. Damodaran, there are two impacts of SBC:</p>\n<blockquote>\n Continuing earnings/cash flow impact: If you are valuing a company that is expected to continue paying its employees with options and/or restricted stock, your forecasted earnings and cash flows for the company will be lower than for an otherwise similar company that does not follow the same practice. These lower cash flows will reduce the value of the business and equity today.Deadweight effect of past compensation: If a company has used options in the past to compensate employees and these options are still live, they represent another claim on equity (besides that of the common stockholders) and the value of this claim has to be netted out of the value of equity to arrive at the value of common stock. The latter should then be divided by the actual number of shares outstanding to get to the value per share. (Restricted stock should have no deadweight costs and can just be included in the outstanding shares today).\n</blockquote>\n<p>I've incorporated these two impacts as follows:</p>\n<ul>\n <li>The continuing earnings impact from new options/RSU grants features in with SBC in line with other tech companies starting off with 21% of revenue in 2021 (approx. costs of $300million) gradually declining to 10% in 2030 (approx. cost of $926million).</li>\n <li>The deadweight impact of past SBC is reflected by netting out from the value of equity, my latest estimate of aggregate intrinsic value of all stock options granted by Palantir of $8.4 billion. The company reported this amount as $8.1 billion in note 10 of 1Q-2021 financial statements as at March 31, 2021, when the closing price of Palantir was USD23.29/share. I've simply recalculated it with the last closing price of USD24.05/share. Also, I've added the last reported number of RSUs of 174,534 shares into the share count to calculate my target price.</li>\n</ul>\n<p>Just to demonstrate the scale of dilution caused by SBC, these two adjustments dilute the target price by approx. 23% (from an undiluted target price of USD26/share to a diluted target price of USD20/share).</p>\n<p><b>Takeaways</b></p>\n<p>Palantir is a company with attractive growth prospects due to a growing need for predictive analytics by government agencies and commercial organizations. Despite its entry into the pantheon of meme stocks, its valuation is not overly detached from reality. However, the stock price being off 47% from its highest level since listing does not mean that we are getting a bargain here and there is no surety that the correction is over. Investors need to rein in the greed itch and wait for an entry point with a decent margin of safety.</p>\n<p>Take everything you read with substantial skepticism and a healthy grain of salt. Invest based on your own financial profile and your appetite for volatility. Information discussed here should not be considered as an \"investment advice\" or as a \"recommendation\".</p>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Palantir: The Good, The Bad And The Ugly</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPalantir: The Good, The Bad And The Ugly\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-06-07 16:53 GMT+8 <a href=https://seekingalpha.com/article/4433368-palantir-the-good-the-bad-and-the-ugly><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nPalantir is a company with attractive growth prospects due to a growing need for predictive analytics by government agencies and commercial organizations.\nDespite its entry into the pantheon ...</p>\n\n<a href=\"https://seekingalpha.com/article/4433368-palantir-the-good-the-bad-and-the-ugly\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"PLTR":"Palantir Technologies Inc."},"source_url":"https://seekingalpha.com/article/4433368-palantir-the-good-the-bad-and-the-ugly","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"1120676282","content_text":"Summary\n\nPalantir is a company with attractive growth prospects due to a growing need for predictive analytics by government agencies and commercial organizations.\nDespite its entry into the pantheon of meme stocks, its valuation is not overly detached from reality.\nInvestors need to rein in the greed itch and wait for an entry point with a decent margin of safety.\n\nPalantir Technologies (NYSE:PLTR) is a favorite stock of ARK Invest and retail investors who see it as the paragon of stocks with exponential growth potential, trading at deep value. Let's take a look at the good, the bad and the ugly side of Palantir with my cynical lens.\nThe good\nThe good thing about Palantir is the growth hype as investors see a very large aura of growth potential around this stock. In the absence of a sky-high price target from a guru like Cathie Wood to anchor hype-based investors, people are dreaming about Palantir as the next $1 trillion market cap company with a juicy 25x upside five years down the road.\nAs they say, most myths begin with a kernel of truth. Palantir is a data mining analytics company founded back in 2003 which went public in September 2020. The need for data analytics has exploded as companies and governments attempt to leverage the ever-growing amounts of data being collected continuously. As we enter the Age of Data, Palantir has won over intelligence agencies, governments as well as commercial organizations with its tools to make better decisions.\nTo put Palantir's growth trajectory into context, its revenue grew at a 5-year CAGR of 25% between 2015 and 2020 and management is guiding that its revenues will grow at 30%+ over the coming five years. Unlike many other nearly two-decade old companies who would experience a gradually decelerating rate of top-line growth, Palantir expects revenue growth to take off in the coming years.\nIn my view, hype is a good thing for a stock, but only as long as it does not become too detached from reality.\nThe bad\nThe bad thing about Palantir is obviously the value perspective. Given the recent IPO and large retail following, the bullish thesis on Palantir dismisses the methodical discounted cash flow-based valuation process in favor of a more flexible \"vision-based\" valuation with which unsophisticated investors feel at home.\nOn January 17th, Palantir touched an intraday high of $45/share before the reflation trade flattened the uptrend in tech stocks. With Palantir trading at around 47% off its high, seemingly a bargain vs. a few months back, there is no dearth of investors afflicted with the greed itch which makes people believe that it's much less risky to invest than to miss out on investing.\n\nThe ugly\nThe ugly things about Palantir are the rude awakening faced by investors about share sales by early investors, its highly dilutive employee compensation structure as well as potential ESG issues in the business model.\nPalantir opted for a direct listing (instead of an initial public offering) under which its employees and early investors sold up to 20% of their holdings directly to the public. The remaining 80% holdings were subject to a lock-up which expired three days after Palantir filed its 2020 financial results on Feb 16th. As soon as the lock-up ended, there were sales by early investors (no surprise) which increased the supply of shares in the market, probably pushing the price down somewhat.\nStock-based compensation (SBC) has been a raw nerve for Palantir ever since it filed its first set of financial statements for 3Q-2020 where it had a large spike in SBC of which $778 million related to 'accelerated attribution' from the direct listing of the company. During 4Q2020 and 1Q2021, SBC remained elevated vs. pre-listing period (see table below) due to what is characterized as 'overhang' by the management which is likely to normalize over the next couple of years.\n\nIn my view, the main issue is Palantir's excessive reliance on dilutive modes of employee compensation like stock options and restricted stock units. Even if we gloss over the blip in SBC for 2020 which is high due to the impact of listing, Palantir's SBC relative to its revenues was much higher than other tech companies for the past several years (see table below).\n\nManagements of tech companies keep repeating the mantra that SBC is a non-cash expense (routinely added-back to calculate non-GAAP profitability metrics). However, the end result of SBC is dilution by issuing new shares to employees at dirt cheap prices. Later on in this note, I will show how much value SBC is taking away from investors.\nAnother ugly facet of Palantir is itsdubious ESG credentialsbecause of its association with the military-industrial complex via the work it does for US Central Intelligence Agency (\"CIA\"), US Department of Defense (\"DoD\") and US Immigration and Customs Enforcement (\"ICE\"). Without passing any judgement on Palantir's business model or the effectiveness of ESG investment style, I think it's safe to say that an ever-growing section of investment funds allocated based on Ethical, Social and Governance (\"ESG\") principals and its predecessor Socially Responsible Investing (\"SRI\") will not fully embrace a company like Palantir.\nThe worth of Palantir\nBeauty lies in the eye of the beholder. In the same way, the worth of Palantir depends on who is looking to invest in it. A hype-based investor HODL-ing glamour stocks is not likely to take the cumbersome route of projecting future cash flows to see if they make any sense vs. the price being paid today. For such investors the future holds a simple promise that 'There shall be showers of blessing.' On the other hand, a value-based investor will invest in Palantir if she sees its DCF-based intrinsic value substantially higher than the current market price and notices triggers for this value gap to be bridged.\nIn my view, the worth (or DCF-based intrinsic value) of Palantir is USD20/share, quite a way below its prevailing market price. Despite its cult-like status in the meme stock hall of fame after the post-listing mad-rush, the valuation is obviously not too overstretched, thanks to the sharp correction.\n\nI calculate the worth of Palantir as USD20/share based on an explicit cash flow forecast for the next ten years with exponential growth (based on my best-judgement rosy outlook) and a terminal value assuming Palantir matures in ten years and enters a steady state of stable growth.\nLet's unpack the ten-year exponential growth period assumptions. In the first five years, I assume that revenues will grow at an annual growth rate of 30% (per management guidance). From year 6 to year 10, revenue growth gradually tapers offs to an average annual rate of 18% pa.\n\nThe favorite profitability metric of Palantir management is Adjusted Operating Margin (which essentially ignores stock-based compensation i.e. Adjusted Operating Profit = EBIT + SBC). For the first year of the exponential growth period, I assumed Adjusted Operating Margin of 23% (management guided to this margin for 2Q-2021 only). From year two onwards, I assumed a gradual expansion in Adjusted Operating Margin thinking that some of the non-SBC costs will be of fixed nature, i.e. Palantir will enjoy some benefit of its growing scale in the form of fixed costs spread out over a bigger revenue base. I've assumed about 9% pt expansion in Adjusted Operating Margin over year two to year ten.\nSome readers with a bearish view could question this assumption as not being realistic. Well, it's just a guess to incorporate potential sticky costs in the analysis although, to be fair, it's next to impossible to quantify the level of stickiness in operating expenses with any degree of accuracy. Nevertheless, there is a clear evidence (see table below) of some sticky costs in the last three years of financial data where the ratio of non-SBC COGS + Opex to revenues has declined with the growth in revenues.\n\nThe other key assumptions are terminal growth rate and discount rate.\nI've used a terminal growth rate of 3% to grow Palantir's cash flows into perpetuity once it enters a steady state in ten years. Terminal growth rate is a notorious assumption in DCF models. The higher the terminal growth rate assumption, the higher the intrinsic value. This is even more true for Palantir, whose intrinsic value primarily comprises of terminal value while cash flows for the exponential growth period of ten years comprise a very negligible portion of the overall value.\nThe discount rate (or Weighted Average Cost of Capital or \"WACC\") is 5.27% derived from CAPM formula. This is the rate that is used to discount the future cash flows to calculate a present value. So unlike a lot of self-taught retail investors who love to assign a target price five years down the road based on valuation multiple, we are moving in the opposite direction by calculating how much the future cash flow stream is worth today and then deciding to buy or sell if the worth today is higher or lower than market price.\n\nHow dilutive is stock-based compensation?\nA lot has been said about the dilutive impact of the high level of stock-based compensation offered by Palantir to its employees. However, the big question is how do we factor this impact into the valuation to see if the slumping stock price has already reflected the upcoming hit from exercise of stock options and vesting of restricted stock units.\nTo set the stage, I turn to the Dean of Valuation,Prof. Aswath Damodaranto gauge the impact of SBC.\n\n The stock-based compensation may not represent cash but it is so only because the company has used a barter system to evade the cash flow effect. Put differently, if the company had issued the options and restricted stock (that it was planning to give employees) to the market and then used the cash proceeds to pay employees, we would have treated it as a cash expense.\n\nAccording to Prof. Damodaran, there are two impacts of SBC:\n\n Continuing earnings/cash flow impact: If you are valuing a company that is expected to continue paying its employees with options and/or restricted stock, your forecasted earnings and cash flows for the company will be lower than for an otherwise similar company that does not follow the same practice. These lower cash flows will reduce the value of the business and equity today.Deadweight effect of past compensation: If a company has used options in the past to compensate employees and these options are still live, they represent another claim on equity (besides that of the common stockholders) and the value of this claim has to be netted out of the value of equity to arrive at the value of common stock. The latter should then be divided by the actual number of shares outstanding to get to the value per share. (Restricted stock should have no deadweight costs and can just be included in the outstanding shares today).\n\nI've incorporated these two impacts as follows:\n\nThe continuing earnings impact from new options/RSU grants features in with SBC in line with other tech companies starting off with 21% of revenue in 2021 (approx. costs of $300million) gradually declining to 10% in 2030 (approx. cost of $926million).\nThe deadweight impact of past SBC is reflected by netting out from the value of equity, my latest estimate of aggregate intrinsic value of all stock options granted by Palantir of $8.4 billion. The company reported this amount as $8.1 billion in note 10 of 1Q-2021 financial statements as at March 31, 2021, when the closing price of Palantir was USD23.29/share. I've simply recalculated it with the last closing price of USD24.05/share. Also, I've added the last reported number of RSUs of 174,534 shares into the share count to calculate my target price.\n\nJust to demonstrate the scale of dilution caused by SBC, these two adjustments dilute the target price by approx. 23% (from an undiluted target price of USD26/share to a diluted target price of USD20/share).\nTakeaways\nPalantir is a company with attractive growth prospects due to a growing need for predictive analytics by government agencies and commercial organizations. Despite its entry into the pantheon of meme stocks, its valuation is not overly detached from reality. However, the stock price being off 47% from its highest level since listing does not mean that we are getting a bargain here and there is no surety that the correction is over. Investors need to rein in the greed itch and wait for an entry point with a decent margin of safety.\nTake everything you read with substantial skepticism and a healthy grain of salt. Invest based on your own financial profile and your appetite for volatility. 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