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2021-06-07
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Palantir: The Good, The Bad And The Ugly
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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":114131986,"tweetId":"114131986","gmtCreate":1623056079045,"gmtModify":1634095795168,"author":{"id":3561528639144665,"idStr":"3561528639144665","authorId":3561528639144665,"authorIdStr":"3561528639144665","name":"SHAUN","avatar":"https://static.tigerbbs.com/f957e9ccadc0e6cd09e1f350be179747","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":7,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":9,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body><p><span>[财迷] </span></p></body></html>","htmlText":"<html><head></head><body><p><span>[财迷] </span></p></body></html>","text":"[财迷]","highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/114131986","repostId":1120676282,"repostType":4,"repost":{"id":"1120676282","kind":"news","pubTimestamp":1623056015,"share":"https://www.laohu8.com/m/news/1120676282?lang=&edition=full","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. Information discussed here should not be considered as an \"investment advice\" or as a \"recommendation\".","news_type":1},"isVote":1,"tweetType":1,"viewCount":156,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":6,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/114131986"}
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