Why I Changed My Mind On Palantir Stock

I've been following Palunteer stock for a few years now, but ever since the stock was around $20 all the way up to 200, I never really saw an entry point that seemed good enough for me to start an investment in the company and really referred to this company as an overvalued software name. And while I was wrong and missed out on significant upsides in the stock, going from essentially eight all the way up to 200 in a few years, I've changed my mind and become a shareholder of this company. But let's go ahead and discuss why I've actually done this. So over the last little bit, and this happens in stocks all the time, companies can surprisingly give you amazing buying opportunities. And over the last roughly three quarters or so, Palunteer stock has gone from $27 all the way down to $106 per share, down over 40% in the stock. Now, this got down as low as 106, and my lowest buy was roughly about 10750. That being said, the reasons for why I purchased were much more than just a depreciation in the stock price. The importance of Palunteer cannot be misunderstood. And whenever it actually comes to artificial intelligence, this is one of the few software names that is greatly strengthened by their advantage and strengthens their moat rather than tear away from it like what we're seeing in the rest of the sector. Palanteer is not a want to have, it's a need to have in the most critical of situations like the United States military for example. Whenever you're talking about having an advantage over your opposition, you can see it in the numbers. Whenever we talk about this company all the way back from June of 2023, so about three years ago, to now, you ended up seeing the growth go from roughly 12.75% which was right alongside their peers and if not slower than many of the other software names up to roughly 30 40% which you can find names that are growing at that rate to now 85%. This puts them in a class of their own in terms of their growth but growth can come at the price of many many things like for example margin. Any company can grow if you give enough to sales and marketing, but that's not what we're seeing here at Palanteer. And I want to talk more about that. But first, diversification is another thing that we're seeing at Palanteer, which we're not just seeing government contracts come in or United States commercial contracts come in, but actually a healthy mix of both. Palanteer has almost held up a 50% split between their commercial customers and their government customers, which also leads to that great premium that they deserve because of that diversification. The growth across both of these clientele both the United States government and commercial customers both US commercial and the rest of the world has increasingly grown to over 85 plus percents and in the case of commercial actually grown over 95% which is just crazy. But to that margin that I talked about this is where it gets very exciting. This is their contribution profit on their government side which ended up seeing margins climb from roughly 60% up to 73%. well, growing at faster and faster rates. So, not only are customers able to pay those high rates, but they also want it more than ever. That's very exciting on the government side, but there's a lot of discussion whether the government is paying too high of prices. Maybe they're not going to shop around as much as a commercial customer, but we're actually seeing the exact same thing happen on the commercial side with rates going from essentially 50% all the way up to 72.7% very much in line with the government side. And yet the growth is also growing even faster than the government side. Growing at 95% with margins at roughly 72.7% on a contribution margin side. This has led Palanteer into very rare error of what we call the rule of 40. This is a combined both their margin on both a adjusted EBIDA basis and their revenue growth of over 145%. This has climbed up from 64% just 2 years ago, which also is even more than 50% higher than what they call the rule of 40. The rule of 40 is a combined of those two metrics, both the margin and growth rate to try to get a combination of both growth and value. And the essential rule of 40 means maybe you do 20% growth with a 20% margin or a 30% growth with a 10% margin. At least you're having that combined software growth that leads to pretty sustainable, healthy growth of a business. But whenever you're putting up 64% that's very exciting. 80% doubles the rule of 40. 120% triples it. 145 is so unbelievably high in looking to head even higher next quarter that it's just surprising at this point that the company can still fall over 40% in the last 2 three quarters. Palanteer also showed off that the size of the contracts that they're dealing with are getting larger and larger. deals of at least $1 million, 206 with deals that are over 5 million, 72 different contracts signed, and then $10 million contracts, 47 different contracts. So, how does this compare versus previous quarters? Well, one, it's interesting to note that Palunteer's customer count has been continuously growing. While growth has slown a little bit in the last two quarters, now growing at roughly 31%, it's about the deal size. So you can have some customers like the United States government that is not just here might be marked as one or maybe even as high as potentially 10 different customers in the United States government but the amount that they're paying is so much more. But on the deal size what we end up seeing is that the fastest growing rate amongst all of these deal sizes is actually the deals that are signed above 10 million. Those are the ones that are actually growing the fastest. As high as sometimes 100%, 231%, 90%, 51%. The $10 million deal size is growing faster most of the time than the five or even $1 million deals. So customer count is not nearly as important as the size of the customers that they're actually signing. Another thing to note here is that commercial customers are actually growing faster than both government and total customer accounts as well. But then we have net dollar retention, which is even more surprising than any of the previous topics that we've talked about. This is customers that are coming back and renewing on their contracts, but with higher and higher deal values. So, if you have net dollar retention of under 100%, that means that a customer is coming back and signing smaller deals with Palanteer than the years prior. Whenever you have net dollar retention of roughly 150%, what you're saying is, "Hey, I'm going to sign a contract with you that's potentially $1 million. The next deal you come back and you say, "Hey, we like your software so much. We want to actually increase the amount of services that we use with you for the amount of customers that we have for all of these different things." So the next contract is 1.5 million. The next one is 2.25 million. The next one is 3.37 million and so on and so forth if you continue to compound at that 150% rate. And the most interesting part about Palunteer is that they don't include their customers for the first year into their net dollar attention. So you don't have that immediate 100% net dollar retention which would essentially hold up your rates even higher. They exclude that to say this is what the returning customers are doing which is very surprising. And the only thing growing faster than Palunteer's overall revenue growth is the remaining performance obligation which means essentially what's to come next. And that growth is coming in at roughly 135% just yearover-year. That's really the only thing that you want to grow faster than revenue is what their future revenue might grow at. And that's what Palanteer is showing, which is another great sign. And then as well as billings coming in at 93.3%, roughly 1.8 billion. Another amazing sign for Palunteer. But that's not the only thing that we need to look at whenever it comes to net dollar attention or remaining performance obligation. There's other contracts that go way beyond what is actually written in the books. For example, the Pentagon said that Palanteer's Maven program will actually become a program of record, which means they will no longer be bidding to actually secure contracts. They will just be a staple in the United States government overall programs that they end up using. That means they're happy with their service. No one else can replicate it and they're happy with their price, which is huge margins overall as we've seen contribution margin like over 72%. That's a huge price to be paying. And then the government essentially says we're happy to pay that because no one else has been able to replicate what Palanteer's Maven smart system has been able to do for them. And so this is the overall thing that gives their advantage over their adversaries and they're willing to pay for that because they want to win. But let's talk more about the financials and their overall valuation. So Palanteer is one of these companies that has just skyrocketed in their overall take rate recently and that's flowing all the way down to net income. So, this is not one of those companies that's sacrificing their margins in order to sustain growth. While they've gone from 12% revenue growth up to 85%, margins on their net income have gone from 5% all the way up to 53%. You're essentially like almost 8xing your growth on revenue while almost 10xing your growth on the margin, which essentially turns net income from 27 million to $876 million. That's the compounding effect whenever you have revenue growth and margin expansion at the exact same time. Free cash flow margin has gone from 86 million a quarter up to $891 million over just the last 3 years. Essentially a 10x in 3 years. And so whenever the stock ends up climbing in drastic rates over the last little bit, no wonder because it's actually showing up in their financials. Palunteer now has over $8 billion in cash with zero debt. growing that cash pile by over 47% year-over-year, essentially adding on an additional 900 million just quarter over-arter with zero debt on their balance sheet. Currently, they're not allowed to buy back stock right now because they are a defense contractor. That's likely to change in the Trump administration, but right now that's currently in force. Potentially, they could give back dividends or buy other companies or potentially look to increase sales and marketing to expand their overall revenue growth even further. What's better than 85% growth? 95% 130%. There's so much growth that you can do whenever you have capital. The world's your oyster whenever you're doing everything right and everyone wants your product. But one of the things that they're really focused on is bringing down expenses. If we thought margin was high right now, wait over the next couple of years as margins continue to fall. Research and development has gone from 18.6% down to 9%. Which is still relatively high. Stock-based compensation has gone from 21.4% 4% down to roughly about 11% still very high compared to competitors. And then overall SGNA which is sales general and administrative has gone from 59.4% down to 30%. Still relatively high but a major comparison. And you can see along this side there is one very clear trend across all three of these expenses. They are falling over time. But let's talk about valuation because this shows up in many different ways but some of the most popular ways is price to earnings ratios for example which Palanteer still remains quite high at roughly 126 times but if you end up looking across which is almost hugging this bottom sort of 100 mark that we are nowhere near where we were back even whenever this company was way cheaper. So it's actually one of the cheapest prices that we've seen on a price to earnings basis on a trailing basis comparatively to this stock over the last few years even though the company's price the actual stock price has been much lower than this. And then especially on a forward basis at 71 times this is extremely cheap to where we were not too long ago over 200 times forward PE ratios. Same thing can be said about free cash flow as well, showing up extremely cheap comparatively to where we were, not versus other companies, but we'll talk about that here in a second. But on a price to free cash flow basis, we're just at around 100 times on Palunteer and then on a forward basis around 57 times, which can still be considered expensive. That's where comparison comes into mix versus other software names in the industry. If we end up looking at overall growth versus other businesses, I'm looking at Data Dog, Salesforce, Service Now, SAP, Workday, some other very common software names in the industry and we look at that revenue growth. The blue line is Palunteer and shows off a very different picture than what the rest of the industry is seeing. Same thing for software net income margins where the other companies are showing off slower growth. And by the way, revenue growth for Data Dog, for example, starting to increase getting to roughly 32%. But the difference really shows up whenever we start looking at margins. The only company that's been able to sport and almost holds up the highest margin almost every single quarter in this segment here is Palanteer. More than double the next highest company which ends up being SAP at 20%. Palanteer sporting 53.7% almost 2.5 times higher than SAP the next highest. And then Data Dog that sported that 32% growth rate, not even remotely half of what Palanteer is showing up at, has the lowest margin at 5.7% versus 53% almost a 10x higher margin than their next fastest growing company. Like the comparison can't even be made here. But yet, whenever we look at software PE ratios, Data Dog shows up as the highest company. Palunteer second highest, but deservingly so because of that growth in margin profile. But to be fair, this is trailing and we need to look forward in order to get a better understanding of how these companies are end up putting up these valuations. And this is still where I'm surprised. Data Dog still higher at 97 times with less than half the growth rate, almost one-third the growth rate and less than half almost 2.5 times lower the margin and looking to continue to be worse margin into next year. Sports a much higher valuation than where Palunteer is at only 71 times. Most of these other companies are even lower with Workday being as low as 11.2 times their forward PE, but they're obviously growing much slower and they have lower margins. And I'm not considering those companies not undervalued, but I'm still surprised that Palunteer is not clearly the most expensive name on this list. But now we need to talk about beaten raises because this is where forward pees become essentially a guessing game and not actually related to the truth because essentially a company can come out and show a different number than what Wall Street was expecting. But whenever you see the number come in as a surprise to the upside, every single quarter since the metrics that we've been showing off back at Q3 of 2023 up till now, revenue surprises have been anywhere from 0.5% up to nearly 8% or 6% as of the most recent quarter. That is massively accretive to the overall whether it's the PE story or their price to sales. If you expect a company to come in at a certain level and they come in 27% higher, 33% higher, 40% higher, 19% higher, 22% higher, where do you think we're going to be over the next year? If currently the forward PE is 71 times and Wall Street has been a terrible guesser of this company's overall valuation and their overall ability to generate more and more earnings per share. Yet, Wall Street, even with their own projections, is still projecting that this company should be somewhere around $200 a share or roughly 75% higher than where we are today. This is just mind-blowing to me. And while I didn't like the company at 20 all the way up to $200 per share, things change whenever growth rates go from 12% on a 5% margin up to 85% growth on a 53% margin. That's a completely different company. And even over the last two quarters that we've seen growth on Palunteer, I don't think many analysts on Wall Street expected growth to accelerate way more than it did on better and better margins with better remaining performance obligation, which is essentially what's going to happen next. Now showing off growth of over 130%. Alex Karp, the CEO, coming out and saying that the company is likely to grow by triple digits next year, which is only going to accelerate that growth rate and likely to bring on even higher margins. Palanteer is a buy for me here and I'm only looking to add to this position as we stay under $130 per share which I think is more in that sort of very very high likelihood of doing well in my portfolio. Not saying that it's not a purchase above 150 or something like this. I'm not looking to sell this company anytime soon, but in different ratios whether you're looking at this company at 200 or 150 and you can have projections that are even higher, but sometimes companies become screaming buys whenever it was under around $107 per share. I mean, I don't know what the market was thinking bringing it down so low, but I was a heavy buyer there. Let me know what you guys think down below. If you guys want to see more about Palunteer and some updates around this company, make sure you subscribe. Until next time.