“Sell Off Is Over”:
Palantir Technologies (NYSE:PLTR) shares fell fractionally in premarket trading on Thursday even as investment firm Bank of America defended the Alex Karp-led company, stating that this week’s sell-off was “overdone.”
Analyst Mariana Perez Mora, who has a buy rating and a $14 price target on Palantir (PLTR), noted that shares have declined 8.5% so far this week as investors are increasingly concerned about software infrastructure spending heading into a potential recession, the company’s strategy for investing in special purpose acquisition companies and recent downgrades.
“In our view, Palantir’s SPAC investments strategy seemed to be poorly timed and has not achieved its investment objectives thus far,” Perez Mora wrote in a note to clients, adding that the company has already recognized $334M in related losses and may see another $14M hit in the fourth-quarter, given the current stock market environment.
However, Perez Mora added that this strategy is indicative of Palantir’s (PLTR) “aggressive” approach to sales and is likely to see another strong year for revenue growth.
A CEO within a company, basically has two main objectives. Firstly is that of successful running of operations, in conjunction with the deployment of cash generated by operations. The five main methods of capital allocation includes:
- Investing in existing operations
- Acquiring other companies
- Issuing dividends
- Paying down debt
- Repurchasing stock
For Palantir, it seems that their focus on capital allocation is not upon the issuing of dividends, purchasing of stock, or acquiring other companies, but instead is centred on investing in existing operations and paying down debt.
There are some concerns that I personally have regarding managements capital allocation skills, especially when it comes to investing within companies. For example, Palantir recently invested into 20+ early stage companies, and SPACs. It turns out that this decision to investing in these companies was one of regret, and thus indicates poor judgement on the behalf of management.
Realized and unrealized losses on the SPAC portfolio reached 75% at the end of September, or about $333 million, according to my analysis of Palantir’s latest accounts.
The SPAC misadventure features in several class action lawsuits by investors that the company intends to defend “vigorously,” according to its third-quarter accounts. Palantir declined to comment.
One SPAC partner, custom-parts manufacturer Fast Radius, filed for bankruptcy this month just months after going public. Hence Palantir is unlikely to receive the bulk of the $45 million revenue anticipated from that contract and its $20 million investment is probably worth zero.
The original thesis of investments into these speculative SPACs, was similar to that as seen within the Government sector in which Palantir battle-tested their product, and therefore had the ability to iterate and perfect their product.
Palantir, since inception, have battle-tested their software within the context of intelligence agencies, and the Governmental sphere. This is because, throughout the Government sphere, Palantir over an 18 year period were trailing, testing, and adapting their software within some of the harshest conditions possible.
For SPACs, investors originally believed that this program was similar to that as seen within early stage Governmental work. Via the SPACs, this is a methodological approach for testing, trailing, and adapting the product for the needs of smaller companies, therefore allowing for the gradual increase in TAM.
Whilst this point still – I believe – holds truth, it is clear to see that the monetary investments into these companies, was a poor decision.
If anything these SPAC investments highlight the clear unconventionality of Palantir management and sometimes this unconventionality does not succeed.
Future Growth & Morgan Stanley:
“We expect Palantir to repeat another year of strong sales, as continued supply chain disruption and an increasingly expected recession calls for further operations optimization and data management,” the analyst posited. “However, as corporate software budgets struggle, we expect Palantir to pursue that growth with lower pricing and margins (especially considering its current $2.4bn in net cash).”
Perez Mora also noted that at a share price of $6, investors get Palantir’s (PLTR) commercial business for “free” and its government exposure is worth $7 per share by itself.
Morgan Stanley optimistically noted recently that:
Cost pressures should make companies accelerate investments in automation and productivity-enhancing technologies. Many of these technologies are inherently deflationary. Within this note, we provide a shopping list of “deflation enablers.”
Persistent inflation in areas such as labor, supply chain/procurement, and energy give rise to transformational investment across industries. While cyclical forces tend to deter investment in an uncertain macro environment, we believe structural changes in demographics, energy policy and security, and an aging capital base make technologies focused on cost reductions and productivity more valuable.
Software is a “Deflationary Technology in an Inflationary World”.
“The case for digital transformation has never been more urgent or more clear. Digital technology is a deflationary force in an inflationary economy. Businesses, small and large, can improve productivity and the affordability of their products and services by building tech intensity.
The Microsoft Cloud delivers the end to-end platforms and tools organizations need to navigate this time of transition and change.”— Satya Nadella, CEO of Microsoft.
The fundamental purpose of software is to optimize business and consumer processes, automating them to be more efficient and effective. So in a larger sense, one can make the argument the entirety of the enterprise software industry serves the purpose of driving efficiencies within business to fight inflation (as Satya Nadella noted above).
For the purposes of this note, we’ve tried to narrow the focus to vendors whose software targets a specific inflationary cost pressure being seen in the market today.
C3, Palantir, Snowflake – Enabling More Efficient Supply Chains and Logistics with Better Use of Data. Consolidating multiple data sources and making it usable to solve some of the most difficult problems facing organizations and governments is the core functionality of all these vendors. In the context of this report, all three have talked to a significant use case within their customer base of driving logistics and supply chain efficiencies with their software.
To focus on one vendor in particular, Palantir’s core Foundry data platform accelerates the integration of data, allows simulations against that data, enables real-time alerting for any potential disruptions in the data which allows customers to optimize and find efficiencies in supply chains and logistics.
In other words, in consideration of the higher cost of capital, and labour, companies are going to be investing within deflationary technologies and software to gain competitive advantages and to increase efficiencies.