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Julian Lin’s Take on Palantir, Meta Platforms, Alphabet, and Apple

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Julian Lin’s Take on Palantir, Meta Platforms, Alphabet, and Apple

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Julian Lin’s favorite tech stocks. Controversial and interesting Palantir. (0:40) Why Meta Platforms and Alphabet are Julian’s top tech picks. (5:10) Will Apple develop its own search product? (10:00) This is an abridged version of a recent conversation.

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Transcript

Rena Sherbill: Julian Lin, welcome back to Investing Experts. It’s always great to have you on. You run an investing group called Best of Breed Growth Stocks, as many may already know on Seeking Alpha. You talk about a number of different sectors over there but today, I think that we should focus on tech stocks and what’s going on over there.

I wanted to start with Palantir (NYSE:PLTR), it’s a stock you’ve covered. Victor Dergunov was on a few months ago talking about Palantir, how it can go as low as $7 and he’s still going to be buying it because it’s going to go high and he’s long-term extremely bullish on that stock.

I’m curious how you would articulate your bullishness on that stock in particular? And then if you’d care to articulate your thoughts on your — the other kind of main stocks that you’re bullish on?

Julian Lin: Palantir is a very controversial stock. Very, very popular among growth investors. I think with Palantir, for much of its life, it seems like a lot of investors in Palantir seem to care very little about the valuation, which may add to some of its notoriety over more conventional value investors.

But the way I view Palantir is that it is an implementer for artificial intelligence and deployments. It’s always been in this kind of space. And so this rise in generative AI has only helped increase the demand for Palantir services.

And as I detailed in a past public article on Palantir, I believe that they will eventually have what I call an NVIDIA moment. Meaning just there will be a moment where the company shows in the fundamental results that the demand has arrived, that customers are coming, and they’re trying to very aggressively deploy more generative AI applications. But the interesting point with Palantir is that, none of this has arrived yet.

So, there’s some impatience there, but even though revenue growth has been slowing, they have still been able to deliver incredible improvements in profitability. I still remember when it IPO’d just several years ago, a big bearish point was that it wasn’t really profitable, right? The company has always been generating high free cash flow margins. So, it was very low financial insolvency risk, but a lot of that cash flow was due to the fact that equity compensation was so high.

And that’s another topic investors like. But now that Palantir is profitable on a GAAP basis, you no longer could make that argument anymore, right? So even inclusive of any equity based compensation, they’re still generating real GAAP operating profits and their GAAP net income is even higher than GAAP operating profits because they have a large net cash position and no debt.

So they now have a bulletproof balance sheet, very strong cash flow structure. But what’s left is mainly just the valuation. Does not make a whole lot of sense if my thesis on an acceleration of revenue growth does not happen.

So, yeah it remains a controversial stock, perhaps even more controversial now that the stock is performing so strongly as of late, but I think that there are legitimate reasons to be optimistic for that name.

RS: And you don’t think that there’s — the proof is in the pudding at this point – you think there’s still further to go?

JL: Yes, absolutely. I think, well, they obviously deserve credit for making that transition to GAAP profitability. But at my core, I still care deeply about valuation. If revenue growth is, continues trending downwards and gets to like 12%, 10%, 9%. The current valuation does not quite make sense. Just – it doesn’t – it will be a little bit too rich.

The current valuation is clearly pricing in, I mean assuming the smart money is in this, is clearly pricing in acceleration to the 20%, 25% level at some point over the next coming quarters.

I guess one thing I could say is, Palantir investors, they might want to be concerned if growth is not accelerating meaningfully over the next one, two quarters. That might then be a red flag that hope may never reaccelerate based on this generative AI thesis.

RS: In which case, you think then it would be time to get out of the stock?

JL: Yeah. And at that point, I would definitely need to adjust my bullishness for the stock just given, especially if the stock is still trading anywhere close to where it’s currently trading today.

RS: Any thoughts on your other tech favorites?

JL: Yes, I think that it might be difficult to name a compelling small medium cap name just given that valuations are just so much more rich relative to 12 months ago. 12 months ago, you could have just thrown a dart at a board and you could have come up with a pretty attractive thesis for almost any name. But right now I think overall the tech sector will perform strongly, but the average tech stock and they’re kind of more fairly valued.

I think my top picks in the tech sector are still going to be some of those mega cap names. I like both Meta Platforms (NASDAQ:NASDAQ:META) and Alphabet (NASDAQ:NASDAQ:GOOG) (NASDAQ:NASDAQ:GOOGL) for similar, but also different reasons. It’s interesting that Meta Platforms is now trading at a premium to Alphabet, whereas it typically had traded at a discount, a lot of that is due to the fact that Meta Platforms has been executing very strongly.

They delivered an incredible year of efficiency. This year, for example, their Family of Apps profit margins is over 50%, which is quite stunning. Obviously their overall margins is being pulled back due to their ongoing investments in the metaverse, but even then their profit margin is still very high overall. And Meta Platforms have shown that they are a huge artificial intelligence beneficiary.

As a customer of their own artificial intelligence, they have been able to overcome the competition threats from TikTok, overcome the data privacy changes from iOS largely due to AI. And I personally use a lot of their products, Facebook and Instagram. I have noticed how they have been able to recommend posts that I don’t follow.

That’s all AI. It’s quite incredible how strongly they’ve executed at Meta Platforms, and the stock is still trading at compelling valuations, especially if you back out on the Reality Labs’ losses just to try to get a better sense of what you’re paying for that, Instagram and Facebook.

Favorable Future for Alphabet despite Competitive Threats

It’s quite intriguing to observe the current sentiments of the market. There’s a pervasive sense that Alphabet, the parent company of Google, is facing a potential downturn due to perceived threats to its market share. However, there’s a compelling case to be made that the narrative is significantly overlooking the substantial strengths of Alphabet. Let’s break down why the current buzz around the company may not be capturing the complete picture.

Potential Upsides of Alphabet

It’s fascinating to note that despite the prevailing concerns, Alphabet is actually trading at an undervalued position. The market seems to be discounting the robust moats that Alphabet maintains.

Alphabet has taken a different approach from other tech giants when it comes to managing its workforce. A mere 3% layoff during challenging times demonstrates the untapped potential for Alphabet to elevate its earnings by leveraging this cost-saving strategy.

Blind Spots in the Conversation

While many are fixating on the competitive threats and legal battles faced by Alphabet, there’s surprisingly little discussion around the significant advantages that could come to fruition for the company over the next five years. It’s curious to see how this aspect often gets sidelined in the current discourse.

Meta Platforms and Google Concerns

On Meta Platforms’ front, while the company seems to be excelling currently, the risks associated with overinvestment in certain ventures, especially the Reality Labs, warrant attention. It’s imperative to closely monitor whether the returns from such ambitious ventures align with the heavy investments being made.

On the other hand, at Alphabet, the potential threat lies in the possibility of failing to establish the enduring value and uniqueness of its search business. The scenario where Apple shifts away from Google’s search services to its own or other alternatives could pose a significant challenge. The lack of control over outcomes related to legal proceedings and the decisions of tech giants adds an element of unpredictability to the future landscape.

An Insight on Apple’s Search Product

Amidst the ongoing speculations, the idea of Apple venturing into its own search product is intriguing. It’s indeed perplexing why Apple, who endeavors to possess ownership over its products, has not delved into search services. The potential emergence of an Apple search alternative could pose as a pivotal moment for Alphabet, reshaping the competitive dynamics in the tech sphere.

Despite these considerations, the potential for margin expansion at Google remains a significant ray of hope. The expansive market coupled with an attractive current valuation makes Alphabet a compelling long-term prospect, even in the face of potential Apple threats that are not the primary focus for Wall Street at present.

The Bigger Picture

It’s crucial to move beyond the prevailing narrative and recognize the nuanced shifts within the tech sector. The profitability profiles and valuations have undergone considerable transformation compared to just a few years ago. It’s undeniably perilous to dismiss the tech sector outright and taking a short position would be akin to playing with fire. There’s a wealth of opportunities beyond the tech sector, and exploring growth prospects beyond tech might yield favorable results.

All things considered, the existing market discourse lacks a comprehensive understanding of Alphabet’s potential, and it seems prudent to venture beyond the surface-level analysis to discern the true value that Alphabet encompasses.

For those intrigued by the growth-focused investment approach, delving into a comprehensive portfolio under the “Best Of Breed Growth Stocks” on Seeking Alpha could unveil a treasure trove of lucrative investment avenues.