Dear Reader,
Today I want to talk about Palantir.
Palantir announced terrific earnings this week, and I got a bunch of questions from readers.
People associate me with Palantir because I banged the drum on it for years…
From around $7 in 2022 all the way up to around $20 a share.
I had the company on my watchlist because you know I am very interested in AI in warfare.
I remember very clearly when their CEO, Alex Karp, was the first American CEO to meet Zelensky in Ukraine
after Russia invaded.
That’s pretty serious.
And he was one of the first CEOs to meet Benjamin Netanyahu in Israel after their war started.
When the heads of countries at war were calling this guy to come and meet them, that got my attention.
That’s why I’ve been a fan of this company for such a long time.
As many of you know, I recommended selling out of our Palantir position at what I thought was a fair valuation (we made over 400%).
Of course the stock went up after we closed the position, as happens sometimes.
It’s just one of those things.
But a lot of you still own the stock and have written in after the earnings came out.
Remember, I love this company. It’s one of my favorites in the world.
But a lot of people have written in say, “Dylan, these earnings are great – up 30%. What do you think? Do you think Palantir’s a buy, sell, or hold?”
And my answer is, and I thought this was a teaching moment, which is why I’m talking about this…
Look, the question is not whether or not Palantir is a great company.
We all know it’s a great company.
This is such a kick-ass company.
I love it, okay?
The question for me is, what is this great company worth?
And that’s a very different question.
Look, a Toyota Camry could be the best car in the world.
If you told me it could run forever on one oil change…
Would that make it worth $250,000?
$300,000?
Or is it worth $40,000 or $50,000?
Which is what they sell for now.
I don’t drive a Camry.
I know they’re reliable cars.
A friend of mine owns one, has owned it for years.
Again, the question isn’t whether Palantir is a great company.
The question is, what is it worth?
Those are two very different questions.
And thankfully history shows us.
There are very easy ways to value companies.
I’m going to teach you a back-of-the-napkin way to value any company.
It’s primitive, but effective.
You think about if you were a private business owner, and many of you watching this own or have owned private companies…
What would I pay for this business?
And the way private business owners like me decide what to pay for another business (and I bought another company earlier this year) is, what is the cash flow?
If I buy this company, what kind of cash am I as an owner going to get to pull out of this company every single year?
And then I pay a premium of that – 3, 4, 5 times that cash that I can pull out depending on its growth rate.
We call that free cash flow to equity or free cash flow to earnings.
Warren Buffett, who I am going to be talking about, calls it “owner earnings.”
What would an owner be able to pull out of the business?
Palantir’s owner earnings, its adjusted free cash flow, is expected to be $1.8 billion.
Now, full year revenue, they expect to be about $3.9 billion, up from a range of $3.74 billion.
30% growth, AI adoption, all this is going great.
And owner earnings, free cash flow equity, the amount we would get in our pocket if we bought Palantir is expected to be $1.8 billion.
So a back of the napkin calculation of what Palantir is worth, is to take that and divide it by the 10 year treasury yield.
You could take $1.8 billion and divide it by 0.04 and you’re gonna get a number around $50 billion, because that’s how much you’d have to invest in U.S. treasuries to get that free cash flow in your pocket.
And then you apply a growth rate.
You say to yourself, okay, if it’s $50 billion and it grows 30% a year, what do we have over the next few years?
Basically, that is what the company’s worth.
That puts Palantir’s value around $30-$40 a share.
But Palantir’s stock is selling for $108 a share.
It’s selling at a market cap of $256 billion.
Palantir is selling, in my view, for more than it’s worth.
Palantir has become kind of a movement stock, like crypto or Tesla, etc.
Not necessarily even about the fundamentals anymore.
It’s a statement stock.
It means something. It used to be a statement against woke ideology.
And people love it.
I love the company too, but again, in the business of investing my retirement funds, I can’t afford to make mistakes and buy story stocks just because I happen to believe in the ideology of the CEO.
‘Cause that’s not gonna get me a retirement that I want, okay?
What’s gonna get me a retirement that I want is buying things for less than they’re worth.
Palantir, when we started recommending it three years ago, was a slightly smaller company, but was trading at $7 a share.
It was trading below what it was worth.
Below that $50, $60, $70 billion range that it’s probably worth on a free cash flow to equity, owner earnings basis.
I like Palantir. I love Palantir. I believe it’s worth $40, $50 a share.
I wanted to address this, because I’m just getting inundated with these questions.
But the good news is Palantir itself is investing in small little companies that are taking Palantir’s AI platform
and using it to solve big problems.
Like air traffic control, for one, which we talked about yesterday. And all kinds of stuff.
“The Buck Stops Here,”
