Palantir Q3 2022 – Value punishment

Palantir is punished for its high revenue multiple.

• Palantir reported reasonable results but a small FX-related adjustment to guidance sent the shares down 11% in an indication of just how nervous the market remains about companies that still have high short-term to medium-term valuations.
• Q3 2022 revenues / Adj-EPS were $477.9m / $0.01 in line with forecasts of $474.9m / $0.02 and the company maintained its guidance for Q4 and FY 2022.
• However, the strength of the US dollar is causing some problems which has forced the company to adjust its guidance downwards by $6m in revenues reducing FY guidance by 0.3% to $1.900bn – $1.902bn.
• The company also slightly raised its guidance for FY 2022 adjusted operating profit to $385m.
• Overall revenues remain robust, but the market is clearly fretting that the company is beginning to slow down its growth.
• Overall growth was 22% YoY with by far the best of the growth being in the USA from both corporates and the US government meaning that RoW was probably pretty slow.
• Even after yesterday’s drubbing the shares are still on a 2022 EV/Sales of 6.5x which in this market still leaves no room for error.
• The other problem with Palantir is the relentless share dilution from the employee options program which this year will cost around $600m in accounting terms and around 130m shares will be added to the diluted share count.
• One could argue that US GAAP double counts this cost with an expense in the income statement and increased share count meaning that the best way to deal with this is to do a DCF calculation using the estimated share count from 2025.
• This I have done using a 10% discount rate and a steady deceleration of growth over a 10-year period to 5% as the company matures.
• This gives a pretty conservative estimate of the value of the shares over a 3-5 year period which I think is somewhere around $9.9 per share.
• This offers  41% upside from where we are now meaning that in the long term, this is one to own.
• This is especially the case as the company still has growth and is demonstrating a degree of resistance to the weak macro.
• Furthermore, every client I have ever spoken to who uses Palantir tells me that once you start using it, it is very hard to stop which gives Palantir a competitive edge as well as pricing power.
• Hence, I think that Palantir will ride out the current environment in pretty good shape but that does not mean that the shares won’t go lower.
• Hence, I am inclined to start accumulating the shares at these levels with a 3-5 year view with a view to buying a lot more if it continues to fall.