TIP841: Palantir – Palantir is Cheaper than I Thought! w/ Daniel Mahncke & Shawn O’Malley

Shawn O'Malley shares his perspective on Palantir, highlighting that while it is not a traditional value play, he sees significant potential within the company. He notes that a year ago, Palantir traded at double the multiple with half the growth rate, indicating a shift in market perception. O'Malley explains that Palantir's software enhances communication and efficiency by connecting disparate systems within large organizations, utilizing an ontology to map relationships and actions.

The episode discusses Palantir's revenue growth, which was as low as 12% from 2019 to mid-2023 but surged to 100% year-over-year following the introduction of AIP, which improved software efficiency and customer onboarding. The company's net dollar retention increased from 100% in 2023 to nearly 160% in the last quarter, and Palantir recently closed 220 deals worth at least one million dollars each. O'Malley points out that Palantir's net profit margins have risen to 60% from about 3-4% in 2023, resulting in a rule of 40 score of 155%.

Despite these positive indicators, O'Malley notes that the market has assigned high multiples to Palantir based on trailing earnings, which may not accurately reflect its future growth potential. He highlights that while US growth has accelerated, international growth, particularly in Europe, remains sluggish at 30%, partly due to resistance to American companies. CEO Alex Karp aims for growth rates equal to or above the US commercial business over the next 18 months, potentially reaching revenues of 17 or 18 billion dollars by the end of 2027.

Palantir's unique model requires forward-deployed engineers to set up tools at enterprise customers, a strategy not commonly adopted by competitors. This, combined with its AI-native solutions, positions Palantir distinctively in the enterprise software market. However, the company faces scalability challenges, as evidenced by a decrease in growth rate to 12% in 2023. Customers report significant efficiency gains and cost savings from Palantir's products, which have been showcased through over a thousand workshops.

Palantir holds over nine billion dollars in cash and has no debt, but stock-based compensation at 13 percent of revenue raises concerns about shareholder dilution. The narrative around Palantir's attractiveness for buybacks has shifted, and the termination of its share repurchase program in January may present challenges for shareholders. Mahncke discusses how Palantir's growth has accelerated while its valuation has decreased, making it a more appealing investment opportunity, but he emphasizes the need for the company to invest in its workforce to meet rising demand.

Mahncke expresses concerns about Palantir's partnership with Accenture, questioning the effectiveness of their deployment strategy given the disparity in employee numbers. He believes analysts have consistently underestimated Palantir's potential and predicts that if the company maintains its growth rate until 2027, its price-to-sales ratio could decline significantly. However, he acknowledges that future growth remains speculative and contingent on various factors.

O'Malley expresses intrigue about Palantir but remains cautious about investing, noting that the company's success is closely tied to its top-line growth. He envisions a scenario where Palantir's growth could be halved in the next earnings report. O'Malley estimates Palantir's fair value could be $90 based on analyst estimates or $240 based on Karp's projections, but he does not anticipate dividends or buybacks in the near future. Both hosts agree to refrain from investing in Palantir at this time due to uncertainties surrounding the company's growth drivers.

Mahncke believes Palantir's stock was reasonable at $130 if one believed in its growth potential, expressing greater interest if the stock fell below $100. He notes that Palantir's stock has risen 2400 percent from its lows in 2023, yet many investors may not fully understand the underlying factors driving this performance.