Palantir Technologies & The Retail Investor Root Problem

But also for this very reason, giving all diligence, add to your faith virtue, to virtue knowledge, to knowledge self-control, to self-control perseverance, to perseverance godliness, to godliness brotherly kindness, and to brotherly kindness love. For if these things are yours and abound, you will be neither barren nor unfruitful in the knowledge of our Lord Jesus Christ.

2 Peter 1:5-8

The Bible is clear of the attributes that a follower of Jesus Christ aspires for and exhibits. The truth is that as a Christian, I fail many times at these attributes. But as I read God’s word, I can continue to grow in my maturity and with the Holy Spirit and Jesus as my Savior, attain them. God is with me and as I read these words, they stand out individually and collectively in what defines my life and how I show God’s love to others.

These words from God are powerful across life’s many areas, including the topic of investing. When I think about the angles of investing whether it be the long or short side of the market; virtue, knowledge, self-control, perseverance, godliness, brotherly kindness, and love all resonate with the challenges and issues associated with market dynamics, volatility, and its forms of pressure. God promises that I will be neither barren nor unfruitful in the knowledge of my Lord Jesus Christ, this is true for all aspects of my life, especially so for decision-making.

Palantir Technologies, Inc. (PLTR) is a stock that continues to display public debate due to the contrast of the company’s potential versus its valuation. Clearly much of the recent volatility has been a product of the broader market gyrations. PLTR has been exponentially impacted, being down 29 percent from its all-time closing high, with the NASDAQ down 12 percent as of last Friday. Concerns of contraction/recession and uncertainty remain at the forefront.

What has gotten retail investors so fired up is PLTR’s artificial intelligence, or AI integration into its data platform products. Combined with sustained customer wins, increasing expectations, and this past week’s AIPCon, retail investors continue to swirl with increasing optimism, adding fuel to the company’s future investment potential. This has manifested itself in a huge premium for the stock price.

The opposing sides of the spectrum live in very different extremes. On the one hand, there are those who think that PLTR is headed towards trillions in enterprise value and that this future cannot be quantified. On the other hand, those looking at the company’s valuation see an extreme premium currently, that is not sustainable, despite the company’s future growth, notably through the mid-term. This extreme divergence puts either side at a loss for dialogue as the disconnect is based on very different ideals.

Each retail investor has the right to ascribe their investment style and justification to assert conviction. And the intent of this blog is not to attempt to presuppose which is the best path, but rather to identify the primary issue and consideration that drives this divide.

The root issue for PLTR and the retail investor is PLTR’s shares outstanding. No matter what side of the fence a retail investor has chosen, the number of PLTR’s shares outstanding serves as an impactful variable. It has not really been highlighted much through divisive discussions on valuation versus potential, but it is important to digest as part of the problem, nonetheless.

In addition to PLTR's shares outstanding, consideration needs to be made as to how the company monetizes its customers through its contractual arrangements. The NVIDIA Corporation (NVDA) syndrome of some retail investors expecting compounding doubling of revenue growth has influenced expectations for PLTR. Looking to much of Big-Tech and many of these companies who have achieved the trillion level threshold, did not see doubling of their revenue as a core driver, but rather continued 20-40 percent growth through each degree of scaling the business.

Today’s Big-Tech companies have shares outstanding in the billions; as high as 24 billion for NVDA to 2.5 billion for Meta Platforms, Inc. (META), and only 428 million for Netflix, Inc. (NFLX). This circumstance is a product of time whereas these mega cap companies have grown over decades in many cases and as they have scaled successfully through revenue and cash flow growth, their shares outstanding have commensurately performed.

It is easy for retail investors today to look at NVDA’s 24 billion shares outstanding and think that this is where a company like PLTR could be headed. But NVDA as late as 2021 had 620 million shares outstanding. In fact, all Big-Tech companies had well below one billion shares outstanding during earlier growth stages for the business, including for areas of growth from an IPO stage like PLTR. PLTR did have a long history of operations well before the IPO, so each company is different from a start-up phase to commercial revenue operations.  

PLTR went public through a direct listing back in 2020. Still, the company’s shares outstanding during this time stood at just below 1.8 billion and by 2020 year-end, the company’s enterprise value stood at $41 billion. Today these shares stand at 2.4 billion with enterprise value at nearly $200 billion. This diluted aspect of shares outstanding serves as a barrier to the company's performance, and so far, the push has been to disregard this factor.

This imbalance of shareholder dilution right off the bat immediately placed PLTR in a tricky situation where the company’s enterprise value was already nearly 40 times that of its current sales at a little over $20 per share. PLTR has only witnessed a couple of years where the stock price was more reasonably valued from both an enterprise value to sales and cash flow perspective, 2022 and 2023. But during these times, the perception was that the company had been punished along with broader market moves.

As such, before and after these two years of more normalized valuation, PLTR has continued to imbue a premium level that is arguably unsustainable. This is a direct result of the company’s share dilution, which, for a new company going public was extreme as compared with most technology peers including Big-Tech. This is key because many retail investors are expecting PLTR to become a next-in-line Big-Tech peer. And any speculation that PLTR will simply begin to grow revenue in a leapfrog manner is dangerous as there is no strong precedent for this, aside from NVDA which is a special situation.

Regardless, there are still those that it is not fair, nor prudent, to simply look at PLTR’s historical or current valuation levels. The argument is that the company has so much potential that over the next decade there is no way to fully quantify it. This again, raises the key point for consideration, can PLTR at some point scale its business parabolically or not. This is important because in order for those thinking that PLTR cannot be quantified at today’s extreme premium, must assume that the market and Wallstreet are misinterpreting the company’s revenue growth potential.

PLTR initially claimed that the company would be witnessing 30 percent annualized growth for the foreseeable future during the 2020 IPO. While this lasted through 2021, the narrative quickly changed during 2022 and 2023. With the return to north of 30 percent during 2024, PLTR has guided for similar performance in 2025, but the expectation is for growth to dip back below this level in 2026. With all the current information available, there is no clear indication that PLTR will witness an NVDA-like event of compounded doubling of revenue performance at any point until proven otherwise. Again, someone could simply say, well, it will happen when it happens and that, cannot be modeled.

PLTR discloses that it typically enters into five-year contracts, as well as shorter term contracts. PLTR's focus is for contracts that review, but the company does include provisions requiring customers to opt-in to expand the term as well. As is customary, there is no requirement to renew, upgrade, or expand any of these arrangements. As a part of this, the company's total deal value and its relationship to revenue recognized by commercial customers and government agencies displays a declining relationship which is important to note as it is a core reason suggesting that PLTR will not experience a doubling of revenue for the foreseeable future.

Equally important to revenue growth is PLTR’s operating cash flow margin, which currently sits at 40 percent. There are many retail investors who mirror the logic of valuing a technology business by free cash flow, but most retail investors typically are unaware of the calculation required to measure a company’s true free cash flow that should account for regularly occurring line items like stock purchase plans, stock-related taxes, lease payments, acquisition-related expenses, among others. For many early-stage post-IPO robustly growing technology companies, free cash flow can be higher than operating cash flow, but this tends to revert once these line items normalize.

Putting it together and I have modeled PLTR to grow at an annualized rate of 33 percent through the mid-term while sustaining the 40 percent operating cash flow margin. This equates to $12.3 billion in revenue and less than $6 billion in cash flow. Today, this model is well beyond average Wallstreet analyst estimates, and I view it as an aggressive scenario.

Again, the point is not about trying to convert those thinking today’s PLTR stock price is justifiable and will only go up, versus those believing it is overvalued. The former can simply rebut this financial model and claim PLTR could double this amount or more by 2029, and that the stock price could be $400 per share. But both camps should continue to think about PLTR's share dilution and its implications, as well as how PLTR makes money based on its contractual arrangements and total deal value.

The primary point is that PLTR’s shares outstanding are dilutive for investors presenting an issue and atypical path towards the company’s growth expectations. Additionally, consideration of the company’s ability to witness an inflection moment of growth ala NVDA may be a further fetch as today, there is no indication that this type of performance may be on the horizon.

Social media interaction should not be about I’m right and you are wrong. We should challenge one another to think and have as healthy of a dialogue as possible. It is not always easy, but like God’s word emphasizes and challenges me, I need to think beyond myself to provide any value to others and to continue to grow and mature in my knowledge and discernment for my own personal investment decision-making.