Palantir has been one of the undisputed winners of the AI revolution. Burry says the good times won’t last.
Michael Burry is something of a legend in the investing community. He made a name for himself by being among the first to predict the crash of the subprime lending market in 2008. His high-stakes bets yielded a veritable fortune, making him $100 million personally and $725 million for his investors. The movie that profiled these events, The Big Short, has become required viewing among the Wall Street set. So when Burry talks, investors tend to listen.
The famed investor recently made a rather dire prediction regarding Palantir Technologies (PLTR +0.26%). In a 10,000-word manifesto posted last week, Burry laid out his bear thesis against the artificial intelligence (AI) and data mining specialist. He listed several possible scenarios, resulting in outcomes ranging from $21 to $146 per share. He went on to suggest that the most likely scenario is that the stock has a fair value of $46 per share, or 65% below its current level. “I believe Palantir’s recent winning streak will not endure,” Burry says.
With all due respect, I think he’s dead wrong.
Image source: Getty Images.
Objects in the rearview mirror
Burry spends much of his analysis digging through Palantir’s past, focusing on the fact that the company was unprofitable for much of the past two decades. He points out that many of Palantir’s sales were one-offs, not generating any additional or recurring revenue.
Another point of contention was Palantir’s heavy spending and significant losses, which plagued the company throughout much of its history. Bury also took issue with how the company accounted for its forward-deployed engineers and with the inclusion of certain costs in Palantir’s research and development expenses. He also cited the “egregious stock-based compensation” compared with what he describes as “remarkably few dollars in revenue.”
While these points offer an intriguing history lesson, Palantir’s current results provide a compelling rebuttal.
Current circumstances
Palantir’s recent results paint the picture of a company firing on all cylinders. In the fourth quarter, revenue of $1.4 billion climbed 70% year over year and 19% quarter over quarter. This marked the 10th consecutive quarter of accelerating revenue growth. This drove adjusted earnings per share (EPS) up 79% to $0.25. Yet these impressive numbers tell only part of the story.
Revenue from Palantir’s U.S. government segment jumped 66% year over year to $570 million. However, the headliner was the U.S. commercial segment, which soared 137% to $507 million.
Today’s Change
(0.26%) $0.35
Current Price
$135.24
Key Data Points
Market Cap
$323B
Day’s Range
$131.17 – $136.21
52wk Range
$66.12 – $207.52
Volume
54M
Avg Vol
45M
Gross Margin
82.37%
The results were fueled by unprecedented demand for Palantir’s Artificial Intelligence Platform (AIP). AIP connects to a variety of disparate systems, analyzes data, and provides companies with real-time solutions. This helped drive a total of 180 deals worth at least $1 million during the quarter, including 84 worth $5 million and 61 worth $10 million.
Palantir ended the quarter with a record $4.26 billion in total contract value (TCV), up 138%. Furthermore, the company’s remaining performance obligation (RPO), or contractually obligated revenue that hasn’t yet been recognized, surged 143% to $4.21 billion.
Finally, Palantir’s so-called “rule of 40” score, which measures the earnings quality of software-as-a-service companies, comes in at 127%, when any number over 40 is considered financially healthy.
Simply put, these are hardly the metrics of a company in jeopardy.
Let’s talk about valuation
To be fair, there’s one area of contention where Burry hits the nail on the head — Palantir’s valuation. The stock currently trades for 214 times earnings, and an only slightly more palatable 74 times next year’s expected earnings.
Despite its rich valuation, Palantir is winning over Wall Street. Of the 27 analysts that have offered an opinion, 13 rate the stock a buy or strong buy, up from just six last month. What turned the tide? Palantir’s blockbuster earnings report which illustrated yet another quarter of impressive financial growth and operational excellence.
Speaking of Wall Street, Analysts at D.A. Davidson took issue with Burry’s assessment, reaffirming their valuation-based neutral rating and $180 price target on Palantir. “We read all 10,000 words in Michael Burry’s newsletter and found no new reason to worry about Palantir,” the analysts wrote. They went on to say that Burry’s missive contained “no new evidence or argument” that would change their investing thesis.
With all due respect to Mr. Burry, I believe that Palantir’s results speak for themselves. Sure, the stock is wildly overvalued, but the recent 35% decline in its stock price and rapidly accelerating earnings have already made a dent in its multiple. Investors looking to buy Palantir should consider adding on weakness — like the recent stock price plunge — or using dollar-cost averaging to establish a position.
