Independent Mastery Of Data Systems:
Stock Based Compensation:
Investment fund 10XDNA believes that as a society, we are facing a decade of exponential technological progress, and within the next 10 years – “our world will change more extensively and profoundly than in the last 100 years”.
Recently the fund gave Palantir a $24 price target despite the huge downturn the stock has experienced within recent times.
The innovative fund explains their investment decision, and in terms of fund weighting, Palantir & Tesla is jointly the largest positions in the fund.
Foundry is the interplay between 3 dynamics: also referred to as an OS.
The 3 dynamics Foundry interplays within includes:
- Data platform: includes security, health-checks, versioning of data, pipelines at scale.
- MLOPS lifecycle: ability to deploy ML at scale.
- Operational workflows & application building: build applications via low/no code & define the business processes for set matters.
Overall, this creates an OS: PLTR is the interplay between these 3 main dynamics.
Independent Mastery Of Data Systems:
From our point of view, the greatest risk is the attempt by some companies to independently master the heterogeneity of their data and systems. They usually rely on proprietary solutions for this, which means that Palantir does not even enter into discussions with these companies.
As a rule, Palantir needs a contact person at CIO level in the first step in order to then be convincing at N-1 and N-2 level. Without a positive track record of success and experience (such as SAP can show at many companies), these discussions are not a sure-fire success. If Palantir is not able to convince here, this can significantly slow down the previously exponential growth path and have a significant impact on the value development.
Our discussions within the targeted industries also revealed that Palantir offers products “5-7 years before companies realize they really need them” – this could become a hurdle in the sales cycle.
All relevant competitors will invest significantly in integrated business intelligence capabilities. Should one of the competitors catch up with Palantir or overtake the company, this would also have a corresponding impact on performance.
Doug Philippone, the Global Defence Lead at Palantir, recently stated that “soldiers wanted our platform, however the friction associated was far too high”.
For example, back in 2019 Palantir was involved within a lawsuit with the US Government based on the USCC2377 Commercial Item Preference Law.
This law states how Governments must look towards the commercial markets before attempting to build in-house solutions. Back in the 1980s Governments were building everything in house, leading to much higher costs and a lack of successfully functioning products.
Doug expressed Palantir’s unfortunate association with the partisans & the overall elongated decision making processes within Governments.
“Both Alex Karp and Peter Thiel are certainly controversial figures (see e.g. “The Contrarian: Peter Thiel and Silicon Valley’s Pursuit of Power”), who position themselves very clearly in public, also or especially in political and ethical questions.”
“This also always involves a “headline” risk, which can lead to companies or organizations deciding not to work with Palantir. This can have a significant impact on the further development of the company’s value, which we will go into more in depth in the sustainability section.”
“A mission-critical challenge for almost every tech company is talent acquisition. In order to be able to grow successfully in the next few years, Palantir must win over the leading minds in its core areas, such as artificial intelligence, software development, FDEs and sales.”
“This applies in particular to the launch of new products, but also to the expansion of business outside the USA. If Palantir is unable to attract relevant talent, this can have a significant impact on the company’s performance.”
Our assessment of the company is based on the opportunity for exponential growth. At Palantir, customer acquisition is often driven by pilot projects that generate little or no compensation.
Should Palantir not be able to win customers as a result of these projects, this can have a very lasting impact on the value development. According to our assumptions, the average revenue per customer is also increasing significantly, even if it is already well above other software-as-a-service companies.
Palantir is generally perceived by customers as expensive, which underlines this risk.
A loss on one of the significant investments in young technology companies can also have a negative impact on the company’s value.
Stock Based Compensation:
Important point: On the cost side, Palantir has always worked very progressively with so-called “stock-based compensation” over the last few quarters, in which shares have been issued to top management at reduced prices. In the last few quarters, this has meant that the non-adjusted operating results have been negative.
In 2020, for example, around 1.3 billion US dollars (!) were invested in this type of compensation. In our understanding, this issue of shares was linked to the IPO and corresponding membership in the company.
This practice typically leads to dilution of the other shareholders as new shares are issued at a lower price (the corresponding exercise price of the option – “Strike”).
It is our understanding that approximately 30% of the total share capital remains outstanding in stock options and restricted stock units which may result in further shareholder dilution.
We are for aligned interests between shareholders and top management. Stock options, or RSUs, which are only ever worth as much as the stock price minus the option’s exercise price, are a good way to do just that, in our view.
The magnitude and the possible dilution here are certainly at the upper end in a market comparison. In our valuation of the company we are therefore adjusting for stock-based compensation costs but will keep a very close eye on further dilution.
Based on the publications in the last quarterly report, we assume that the amount of compensation will be halved next year and will only be between 100 and 200 million US dollars in 2025. However, should the company continue this practice excessively, it may have a negative impact on performance.