Palantir Q4 2020 – Rollercoaster

Another good company bad stock scenario.

• In the grand scheme of things, Palantir reported excellent results but because the company trades at 2021 EV/Sales of 32.5x, nothing less than a guarantee of a continuation of blistering growth is enough, meaning that the stock fell 13%.
• Q4 2020 revenues / EPS were $322.1m / LOSS$0.08 ahead of expectations of $301m / LOSS$0.14.
• Revenue for the year 2020 grew by 47% YoY and the expectation is that it will grow by around 45% for Q1 2021 and greater than 30% for the full year.
• The wags of Wall Street were quick to point out that this implies that there will be a substantial deceleration towards the end of the year which in turn hammered the share price.
• This of course is the problem with stocks that trade on ridiculous multiples and there is very little that the company can do about it.
• If one looks at the fundamentals, what is really going on here is that the company is on track to hit its target of $4bn in revenues by 2025 but it doesn’t know exactly how or when that is going to materialise.
• This is especially the case in the current environment because no one really knows what shape the recovery is going to take or how long it is going to take to beat the SARS-Cov2 virus.
• Consequently, over the cycle, there is every chance that it will be able to meet this long-term target but there will be bumps along the way.
• The nature of its business (being based on longer-term contracts) allows it to have very good short-term visibility but much less when comes to forecasts that require new contracts to be signed.
• I think that there is every chance that Palantir will grow by 40%+ for 2021 but the current uncertainty is what has caused it to be a little circumspect when it comes to making commitments to revenues it can’t immediately count on.
• This a great example of the dangers of being invested in companies that trade on a narrative as opposed to fundamentals.
• No one is in any doubt that Palantir is overvalued, but while the story is in the driving seat, the shares will continue to rally.
• Tesla is another great example of this where its valuation is pricing in a scenario where the company takes 40% global market share of all automobiles in the long term.
• No one in their right mind thinks that this is a realistic possibility and yet the stock market graveyard is full of the corpses of short-sellers who had the temerity to challenge the narrative.
• This is a very similar situation to the internet bubble in 1999 and 2000 which ended in a technology sector crash as this is also very likely to do at some point.
• In a further chilling sign, the 10-year yield on US treasuries has risen by 30% so far in 2021 which would usually trigger a fall in the stock market.
• However, the market is expecting the Fed to step in and force down the yield with another wave of printed currency being used to buy US treasuries to support prices and push interest rates back down again.
• This is something that I think the Fed must do because the US government and much of the corporate sector is now so indebted that it cannot afford to have rising interest rates.
• Hence, there is likely to be another large intervention pretty soon.
• This is all that is keeping the overvalued stock market afloat and at some point, the printing will have to stop as inflation begins to rise.
• While there are only a few signs of inflation in consumer goods, asset price inflation is rampant as the endless flow of easy money is being pumped into the stock market, commodities and real estate.
• The outlook for 2021 is very uncertain but given what high valued technology shares are pricing in and the punishment being metered out for those that err even a fraction, I am continuing to steer clear of highly valued stocks.
• Instead, I am looking at stocks where I can find value from under-priced assets or where I think that the market has misunderstood the story.
• While I have missed out on much of the narrative-driven asset price inflation, I have been sleeping very well at night.