Alex Karp Just Changed the Entire Palantir Valuation Debate

A lot of people believe that Palanteer looks expensive. The stock has already had an unbelievable run. The valuation is scaring a lot of investors and almost everyone is asking the same question. How much higher could this possibly go? But I think they might be asking the wrong question. See, if Palanteer becomes even close to what I think it can become, there may be a point where we can look back at today's prices and think it was actually cheap. Is it time to potentially continue to buy into Palunteer, hold it, or potentially look to trim some of this investment? If you guys know, I was buying Palanteer. I'm not an early investor in this company. I've been buying in the last few months where I was able to get prices as high as 124 and then all the way down as low as 108 and buying a lot more as that went down and actually became a decent position in my portfolio, especially as it turned back up. And now we're seeing prices that are hovering around $190 per share. So if you were to get those lows that we've seen previously, you are up almost 75% just from that 108 low, just getting back to that 190 price, which is not even an all-time high for Palunteer. Now, even back at 109 108 in terms of the price activity for Palanteer, you could still have a conversation around is this an expensive name? Adding an additional 74% on top of that makes this one of the premier SAS companies in terms of its valuation. It's a very important piece to highlight. To give a quick overview, the reason for this price appreciation quite quickly is because we ended up seeing Q2 come in much higher in terms of their overall growth rate than what Wall Street was expecting. We're showing up almost 93 plus% year-over-year growth. Every quarter seemingly is growing faster than the last. On top of that, overall operating expenses are falling off a cliff, and it seems like they are able to operate this business better and better each quarter. That's allowing them to bring on their first billion dollar net income quarter. Well, bringing on margins that are constantly higher and higher each quarter, most recently a little over 54%. And free cash flow, even higher than that, $1.2 billion of cash being generated to the business at a 62% free cash flow margin. Now, maybe 62 is not sustainable, but there has been a long time where they've been consistently putting up either a 50 to 55% free cash flow margin. The only thing growing faster than revenue is their overall total remaining obligations or RPO, which is now growing at 102% or $4.9 billion is what that's representing. So, that sort of catches you up on where we are on Palunteer's business. If you guys want a deeper look into that, you can check out some of my past videos on Palunteer. They go way more in depth into what that quarter had to offer. The exciting thing that I wanted to talk to you guys about in this update is their earnings guidance because this is severely severely mispriced to where we are today. every single quarter on both EPS and revenue. Revenue being the leading indicator. EPS constantly improving the margin way higher than expected. But that revenue is constantly beating expectations by 6% 7% 8% 7% 9%. It's wild. On EPS, it's obviously much larger than that. We're in sort of the mid20s ranges every single quarter. And that's compounding. Back in the early days, we were expecting 8 cents. We actually get nine. Now we are expecting 33 cents. We got 41 cents. So this company is constantly compounding wellbeating expectations. It's not the overall growth rate that I'm excited about. It's the surprise verse Wall Street expectations because the whisper number across Wall Street is what's setting the price and and the tone of the stock. So it's that percent change looking forward. And these are updated as of today's numbers. Wall Street is expecting that growth has peaked at 93% and that we are going to start falling off next quarter. Mind you, last quarter they expected the same thing and the quarter before that they also expected growth rates were topping out at 70%. So this has been constantly wanting to lower going all the way down to 47 plus%. And actually this has not stopped the Wall Street expectations to still price this company higher. Average price target on this stock $230 on average as a cumulative total. That being said, this is one of the craziest quotes that no one is talking about from Alex Karp, the CEO of Palunteer. I am driving the business to grow at a rate equal or above to what we have in US commercial for the next 18 months. There's a lot of ways to interpret what he meant here. So, I'm going to try to break down a couple different ways to interpret what he meant. First off, US commercial revenue growth, which is exactly what he's talking about. US commercial, US commercial overall grew 149% year-over-year. If you were to assume that he meant, hey, we're going to grow at 140% between now in the next 18 months, I think that this is not what he meant. It doesn't look right, everything's wrong, the expectations are completely off, but essentially that would guide to growth 18 months from now being at $8.7 billion. So I thought, you know what, maybe he means at an average. Maybe we can slowly grow like we have into growing at an averaged rate of roughly 149% which would put the curve something like this growing at 103 next quarter 122 the next quarter and constantly ramping that growth way higher than 149 but it would make an average of 149%. this to me you if someone came out and said Tanner that's extremely unrealistic and likely to not happen that's fine I completely understand that but let's say that he meant we are going to accelerate to 147 we want to eventually get there over the next 18 months which you could still end up guiding towards which gets us to about 7.4 $4 billion a quarter by December of 2027. That's essentially what he would be guiding for over the next 18 months. This might be the most realistic outcome, but still versus what Wall Street expectation said was that growth had already topped out at 93% and going to be falling down to 47 and the quarter after that it's actually 43%. We are drastically off Wall Street expectations. I mean drastically. Then we have to talk about margins. What did Alex Karp say whenever talking about the margins in the business as it scales over the next two years? >> In my business, we have much more demand than we can supply. That's like and and by the way, it may be somewhat maybe I may be the crazy person that still only cares about free cash flow, but we have more business than we can apply. And we have look if you just look at our financials you can see like a uh two years out you can see 1518 billion dollars in free cash flow. >> Sorry you're frustrated by this >> 15 to$18 billion in free cash flow after 2 years. Okay so that's a 24month time frame but this was done about 4 months ago or before we ended up seeing the quarter that we saw before. So still on pace to be that sort of end 2027 early 2028 outlook of 15 to18 billion in free cash flow. So let's break down that claim. 15 to$18 billion in free cash flow, assuming a easy 50% free cash flow margin, for which they've been holding up even higher margins than that would still guide us out to roughly 30 to 36 billion in revenue or about 7.5 to 9 billion in quarterly revenue, which is actually the same two numbers that we had looked at from our previous assumptions. Whether they said that they were going to hold at 149% or grow to 149% both are roughly in that range of doing about 7.5 to9 billion of quarterly revenue. The expectations that Alex Karp has said in multiple different interviews is lining up to this company growing at immense immense scale. Now we have to talk about valuation because whenever people are looking at price to earnings or especially forward price earnings on this company at roughly 101 times which is very very expensive versus their peers and we'll take a look at their peers here in a second. You have to remind yourself is this based on Alex Karp's expectations or Wall Street expectations and they're based off Wall Street expectations. So the difference between Wall Street expectations of growing at 45% and I can actually go back here doing let's say in September of 2027 $3.2 billion versus if we go and take a look at either of these two expectations it's 5.7 or 6.3 billion. So the expectations are billions of dollars off whenever we take a look at this forward PE of 101 times. Now, that was revenue. But if you also expect similar amounts of margins of what we're doing today, which Alex Karp has essentially said, hey, we're going to hold those similar margins because he talked about free cash flow, then this is likely way, way lower than what we're actually seeing. So, while there has been a valuation or a rerating in this stock recently going from 108 to 190, you have to readjust what you expect is going to happen from this company. Do you believe what Wall Street is saying or do you believe what Alex Karp is saying? As a reminder, there's a reason why I showed off Wall Street expectations being beaten for every single quarter of the last three plus years is because Wall Street has been consistently wrong. And so, if you were to assume where the price is going to head into the future, is Alex Karp's comments wrong or is Wall Street wrong? Who has been consistently wrong over the last 3 years? It's been only one person that's Wall Street or one entity. On top of that, whenever you look to forward free cash flow, which is what Alex Karp was speaking to directly, there's actually an 83 times forward free cash flow, but this is not once again being priced as if 2 years out, which forward price to free cash flow is never two years out. It's only the next 12 months, but still 83 times is much much lower than what they're guiding for. So, this could drastically change as time goes on. Let's talk about the next Q3 customers that also added on. That was also quite a surprise to what we've seen over the last little bit. Chipotle actually working with Palunteer to track food safety risks. The burrito chain has enlisted Palunteer for a platform that monitors pest incidents, employee illnesses, and other factors. The partnership comes after a nightmare summer of food safety across the United States. If you need to fix something drastic, well, then you need to make a big change in your business. You need to go with the best. You're paying for expensive software. That's Alex Karp software. On top of that though, it's not just commercial companies. US Army awards contract to modernize ammunition management. This is September 17th, $ 48 billion deal. And the most exciting part that I found, this new software platform will replace nine legacy platforms. This is the difference of what all the other software companies can do versus what Palunteer can do. They are completely changing the way the military and the United States government is using software and they're willing to pay up for that. They're very expensive. On top of that, on September 1st, Palunteer to deliver eight of the Titan systems. Those are the trucks that are essentially little software management tools or almost like data centers on the battlefield. They are actually deploying eight of the new Titan systems. Four of which are their advanced models and then four of them are which are their basic systems valued at over $127 million for that full deployment. The contract also includes the integration of new critical technologies in the fielding to the operational army. This is going even past that. The United States is constantly using Palanteer more and more. Now, the reason why I showed you Chipotle and the US Army, we're seeing this mix of both growth happening for US and government. By the way, the margins are almost the exact same. So, you can't really look at a $48 million deal with the United States government and say, "Hey, that's going to be higher margin than the United States commercial side." They're actually at about the exact same margins while growing in similar rates. They're both doing well. Then another company that I've had in my portfolio very recently, Shark Ninja, publicly said that we brought Palunteer on to help us and that they have really focused on the commercial side of our business and the results that we're seeing are extraordinary. It's early days. We are kind of 5 weeks into launching the first phase with them and leveraging it in our business. It has totally changed the way that we are operating as a company. This was not talked about often. There was no reports or anything like this. You had to scrape through transcripts to find this. Shark Ninja is using Palunteer. This is a company that creates blenders and air fryers and vacuums. On top of that, this is one of the best claims whenever talking about Palunteer. Adam is now talking to Palunteer in areas like finance. We are talking to them about supply chain. How do we manage our supply chain more efficiently on both the demand side as well as the supply planning side? That's our biggest kind of macro project is what Shark Ninja told Goldman Sachs at their recent consumer and retail conference. Now, the reason why I brought that up is because of net dollar retention. Whenever a company ends up picking Palunteer, that's one thing, but as those contracts go on, what they realize is that, okay, this has completely changed our business. We need to get in bed with them, further our relationship with Palunteer, and actually do more business with them. And that's exactly what every single partnership has ever seen with Palunteer is a strengthening is an increase in their amount of revenue is an increase in their total software deployment with Palunteer. That's currently sitting at 157% one of the highest numbers that I've ever seen while being focused in covering stocks for the last 10 years. Palunteer has blown away my expectations for growth. People always write about things about customer adoption and our net dollar attention numbers. And as Alec Sharp says here, there's going to be a shift. And as hard as you can believe it, it's going to become even more positive. And some of our older partners still have not showed up in that number, and they will. And so they're saying 157% is not the bottom. We're expected to climb into the 160s, potentially even higher. Net dollar retention is about to break. I mean, true Guinness World Records, like Guinness World of Software business records. Palunteer is unlocking right here. Also in Q3, another partnership with Nebius. This one was very popularized and many people talked about this, but I wanted to just cover this because there's been a major conversation around artificial intelligence and bringing that sort of sovereign AI stack. And what that means is Nebia sort of called out. They said, "One of our recent clients, Shopify, Toby Lucky, the CEO, put out a very famous tweet showing off how they're using openweight models, training it on their own data, and they're actually achieving quality that's much higher than what you can get with chatbt 5.6. The transcript messes up a little bit, but I listened to it personally. It's chatbt 5.6." They said, "This is what Palanteer and Nvidia and us, this is the vision that we expect how enterprises should use artificial intelligence. And to implement this, Palanteer have instruments to create this loop, open models, data back and forth, but they need infrastructure on which it to be run. And this is actually, as Verscell ends up pointing out, where the majority of token use is actually going towards. More people are using openweight models than what you see from the closed weight models of the enthropic and open AAI. Doesn't mean anything's wrong with Enthropic or Open AI. They have amazing businesses and they'll constantly do really, really well. But whenever you're talking about palunteers opportunity, it's growing to the high high majority. The large bulk of where the actual revenue and opportunity will be acred is at the application layer where you're seeing companies like Shopify and Nebius focus on. Nebius even said this used to be what the hyperscalers used to do sending that data there but their companies don't like it because once again their data is shared with everyone. They need a controlled stack where they can run openweight models where it's actually controlled through the models to clouds to racks to the data centers and Palunteer can control that entire stack and we provide that opportunity. So just a little reference to another company that I love, Nebius. They're making huge waves here. Going back to Palunteer, I wanted to talk about a little bit of a valuation comparison versus their peers. As you can tell, and this is not just into guided revenue, this is just to where we already know today. Palanteer is growing at roughly 93%. Breaking out from the rest of their large software peers like Salesforce, Workday, even Service Now, Data Dog or Snowflake, some of the really fast growers. Palanteer puts them all to shame. And then whenever you even talk about the margin that they're acrewing on top of that, yes, I mean you have Salesforce and Workday that are putting up great margins, but once again, they're barely even half the number in terms of the every dollar that goes to the bottom line versus the dollar of revenue. Obviously, Palanteer, if you can stack on both the fastest level of revenue growth with the highest margins, you're on a completely different tier, and that deserves a premium. On top of that, free cash flow margins are coming in extremely strong, putting up amazing numbers versus their peers. That's also being seen at Palunteer. So, let's take a look at where those valuations are versus their peers. Yes, we have a high PE ratio, roughly a hundred times, but so does Data Dog. So does Snowflake. These companies have extremely high forward pees. They expect to improve that profitability over time, but we're not quite there just now. There's another three sort of companies, especially on the lower end where you're talking about Salesforce and Workday. Very, very cheap valuations, but you saw it in terms of the margins and you saw it in terms of the growth rate. They're not quite at Palanteer's level. So, it depends on the type of investor that you are at. Do you want the more expensive fast growing names or do you want the more cheaper sort of value looking names? But then you have to just take a look at these overall businesses as well. You can't talk about Palanteer without bringing up the fact that they have extremely extremely low debt with $9.4 billion in cash. If you were to take a look at the actual cash flow to debt ratios that these companies have versus each other, I mean there's all five of the other software companies that we took a look at and then there's Palunteer in a tier of its own. It's not even remotely comparable and that is why Palunteer deserves this valuation. They're extremely extremely differentiated versus their peers. They can be considered expensive. But whenever you add all these pieces together, the forward guidance of revenue versus what Alex Karp said, the free cash flow expectations, the way that they're doing this without debt and with large amounts of cash. And they're doing this while bringing on new customers. And those customers are constantly saying they're using Palunteer more and more over time even in Q3 with new customers, new government contracts, all this stuff. And also the macro is pointing towards AI sovereignty towards protecting your own data, creating your own models. The data is proving that that is where the value is going to acrue. I think that it's worth it to pay these rates for Palunteer today. even at 190 looking into the future of where they're headed if they can continuously grow into the 100 plus% revenue growth rates they're going to look cheap forward pees change very quickly if you can constantly beat expectations so as surprising as it is as I might look a little differentiated to my other investing peers online I actually still think that Palunteer looks cheap here at around 190 but anyway those are my comments on Palunteer let me know what you guys think if you're buying if you're holding what you believe in this company I've looked looked at a lot of companies. I've never seen anything grow in terms of the margins, the growth rates, the lack of competition, the lack of competition that's even trying. It It's wild. Cheap. Yeah. Well, well, cheap is relative, right? If you believe that this company is going to go from doing what was a billion dollars very recently to $36 billion a year in a 4-year time frame, then yes, very expensive companies can seem very cheap if they are constantly growing. It's hard, right? And this is why valuation comparisons are interesting. It's like a lot of people look at their value and they take a look at that P ratio at 100 times these sort of things and they go well traditionally that's expensive. But what is traditional whenever you're growing faster than the world has ever seen ever of all time? Like there's never been a company to do 157% net dollar attention while constantly saying that they are going to increase that going forward. There's never been a business like this. This is a one of one. There's nothing to compare it to. And so whenever you're looking at a business over not just the next year but over a five or 10 year period, what's the likelihood that they constantly win in these like RFPs versus their competitors and people are looking to potentially they need a a nice software stack and Palanteer is constantly winning and more and more of the overall spend of software as that US Army contract said we are replacing nine different software stacks with Palunteer on this one deal. So they're dominating in market share. They're killing their competitors. They are taking that in at very high margin and there's no one else competing. I think that that's worth a premium and I mean a very large premium especially if Alex Karp's numbers are not being overexaggerated. And looking back on it, there was one claim that Alex Karp made in terms of growing at 30% for the next 5 years. And for the little while, we actually started to not believe him. But then as growth accelerated in the very very back half of that 5-year target, he actually did achieve that 30% compounded growth rate. So Alex Karp has not been wrong on his assumptions or or his guidance expectations. We've not seen him overexaggerate. Now he's calling for this major major ramp in growth, major ramp in free cash flow. If he does that, which I have no reason to believe that he won't. He's been very right on a lot of his guidance numbers before. This company is not going to look sort of cheap. It's going to look, I mean, egregiously cheap, very, very cheap to have a company that is doing 15 to 18 billion in free cash flow per year. I think right now they're doing like less than $3 billion a year in free cash flow. That's going up to 18 billion. How do you put a margin? Like, how do you put a multiple on that? We need a new number for cheap for Micron then. Well, the thing is is that do you believe that it's cyclical? I think that if you were to guide out for 10 years, you cannot tell me where Micron's earnings are going to be. No one could. But I would believe people if they said that there's a likely chance that Palunteer has more customers in 10 years paying similar margins over the next 10 years than where we are today because that's what we've seen in the software space. Sticky customers staying for a long time, hard to replace. We see that these are recurring customers. So that I think is the