Palantir Technologies (NYSE:PLTR) is a pioneering company that provides software solutions aimed at empowering government and commercial organizations to organize and harness their data to make informed decisions. Despite its leading role in the field of artificial intelligence, the company often finds itself under intense scrutiny due to its strong political views, diverse global impact, and the perceived mismatch between its market capitalization and influence on the world stage. This has led to extreme investor sentiment – ranging from fervent adoration to deep-seated disdain. However, it is crucial for investors to remain objective and not be swayed by emotions, irrespective of whether they embrace or despise the company.
When considering an investment in any company, my first port of call is to scrutinize any negative aspects. In the case of Palantir, many of the bear arguments circulating in the market are either misinformed, outdated, or simply misunderstood. This presents a significant opportunity, of which I intend to take advantage by assigning the stock a buy rating. Upon closer examination, it becomes evident that the major bear arguments lack substance when thoroughly dissected. Furthermore, the stock is trading below its intrinsic value.
Reassessing Stock-based Compensation
Stock-based compensation (SBC) has long cast a shadow over Palantir, and rightly so. However, the current outlook regarding SBC is not the imminent disaster that it may have once seemed. SBC has now aligned with industry standards and notably contributes to the growth of Palantir.
The data illustrates that Palantir has gained control over its SBC after a substantial surge associated with the company’s direct public offering (DPO). Despite the continued high dollar amount allocated to SBC, its impact has significantly decreased as Palantir scales its revenues. However, these numbers, in isolation, lack context. It is imperative to compare Palantir’s SBC levels with those of industry peers in order to gain a meaningful benchmark. What may seem like an exorbitant 20% of revenues allocated to SBC within one industry could be perfectly normal in another.
Although Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG) may operate in a similar sphere by providing AI solutions and platforms, their sheer scale sets them apart from Palantir. My yardstick for comparison comprises Salesforce (NYSE:CRM), ServiceNow (NYSE:NOW), Datadog (NASDAQ:DDOG), Snowflake (NYSE:SNOW), IBM (NYSE:IBM), and C3.ai (NYSE:AI). To mitigate variances, I will utilize trailing twelve-month revenue divided by stock-based compensation.
A substantial variance is observable between more established companies and those in the nascent stages. Notably, C3.ai’s SBC equates to a staggering 73% of their revenues – a concerning measure. Following closely is Snowflake at 42%. Conversely, IBM and Salesforce, being more mature entities, lead the pack. Palantir, positioned around the middle, stands at a modest 22%. Nevertheless, my target for Palantir is to approach the 18% equivalent of ServiceNow.
Palantir’s executives frequently extol the quality of talent within their ranks. References to their top-tier employee force are a recurring theme during quarterly earnings calls and media interviews, as evident in a quote from CEO Alex Karp during the Axios Davos 2024 event which underlines Palantir’s ability to attract and retain exceptional talent.
Palantir, over a 20-year period, has garnered the best people. I don’t think there’s any dispute about that. Silicon Valley hated me. Do you know why they hated me? The circus cult leader Karp is marching people away from cockroach.com to help the US government be superior. […] We still get the best people. We retain the best people, by and large. Many of the best companies in the world that have been built are ex-Palantirian.
Measuring this beyond industry temperature remains challenging. However, in terms of numbers, efficiency can be gauged by dividing the employee count by trailing twelve-month revenues. In this respect, among its closest peers, Palantir emerges as the leader.
Comparing the breakdown of SBC costs, it is indeed surprising to note that the majority doesn’t funnel towards research and development (R&D). This consistent distribution predates the DPO. Although there have been epochs where Palantir focused on recruiting and expanding their sales team, this does not manifest clearly in the SBC breakdown. Despite the revelation that the AIP ramp is Palantir’s primary focus, with consistent bootcamps throughout 2023, this does not resonate in the breakdown. The absence of variance in the distribution remains a mystery and is regrettable since it fails to provide any insight into the company’s current focus.
In a nutshell, SBC no longer poses a significant concern. Palantir is ahead of companies within the same maturity curve in the industry and is steadily gravitating towards the benchmark set by ServiceNow, where SBC constitutes 18% of the revenue.
