Oh boy, Cathie Wood just went all in on Palantir and in this episode, I'd like to answer one simple
question: should we? Here's what's going on. A few weeks ago, I shared my long-term vision
for Palantir, a company that many people are excited about but few people truly understand,
so that episode focused on THE COMPANY, what they do for their government and enterprise
clients today, and what they could do for smaller businesses and individuals
in the future. In this episode, I'd like to talk about Palantir THE STOCK,
ticker symbol P L T R, and whether or not it's a good investment. Your time is valuable so
I'll give you the bottom line up front. In my opinion, Palantir is a great investment
IF you're willing to hold it for a long time AND through a lot of volatility.
Stick around to the end of the episode and you'll know exactly why I feel that way. As a bonus,
I'll share the one thing from their earnings presentation that makes me super excited to hold
shares of this company. Full disclosure, I'm not a financial advisor and I now own a TON of Palantir
stock, sort of by accident. (Happy Accidents Bob Ross) After my previous Palantir video,
I opened a position in Palantir, myself. Then, after their most recent earnings call, Cathie Wood
added a lot more Palantir to every single ARK Invest fund. Let's talk about that, first.
Here's how much Palantir stock Cathie Wood added to each fund since their most recent earnings
call: $1.5 million dollars of Palantir got put into ARKX, $14 million dollars of Palantir were
added to ARKQ, $9 million dollars in ARKF, and $43 million dollars of it were added to ARKG.
Cathie Wood also increased her existing Palantir positions in ARKW by over 25% percent
to $127 million dollars and in ARKK by over 28% percent
to a whopping $6 hundred and thirty million dollars. Putting it all together,
ARK Invest now has $8 hundred and twenty five million dollars in Palantir across all of
their funds combined, making Palantir only the second company to be in all six funds,
with the first being UiPath. UiPath is ARK Invest's 10th biggest position overall
and now Palantir is their 16th biggest position overall, jumping up 7 spots from just 3 trading
days ago when it was 23rd. I think it's important to understand WHY ARK Invest has such a bullish
position on Palantir. Let me add some context to our analysis of their most recent earnings call
with this quick clip of Cathie Wood on CNBC's Halftime Report, explaining why ARK Invest added
so much to their position after their quarter 4 2020 2020 earnings call earlier this year:
So, that clip will serve as the template for what we're looking for in this earnings call;
understanding their revenue mix from Government versus Business,
looking at how concentrated their revenue is among their top clients, and thinking about
their future growth opportunities in down-stream markets. I'll also cover their massive stock
compensations and the insider selling of stocks from their leadership team. Let's jump into their
Q2 earnings, starting with their revenue mix from Government versus Commercial businesses.
Palantir's Q2 revenue grew 49% percent year over year, from $252 million dollars to $376 million
dollars in Q2. Their commercial customer count grew by 32% percent quarter over quarter. Not
year over year, quarter over quarter. That's great to see. However, their government revenue
is still growing faster than their commercial revenue; Palantir's government revenue grew
66% percent year over year, as they signed new deals with the Army, Air Force, Coast Guard,
department of Health and Human Services, and the Centers for Disease Control.
By the way, their ability to help with vaccine production, distribution, and administration,
as well as driving innovation across the healthcare landscape in general is why I think
they were included in ARKG. My understanding is that as long as a company has lots of data to pull
together and analyse, they're a potential customer for Palantir. That's why this stock got slotted
into every ARK Invest fund. Let me know in the comments below if I'm missing something and there
are specific industries that Palantir can't help with for one reason or another. With that said,
commercial revenue grew by 28% percent, so not even half as fast the revenue growth on the
government side. I honestly don't think this is a bad thing because they've been involved
with the government for over a decade longer than the commercial side of things. What this really
tells me is that they have a long way to go before they hit a wall on the government side and we can
eventually expect that same kind of growth on their commercial side as their Foundry platform
continues to mature. About 62% percent of their revenue is currently coming from government
projects and the remaining 38% percent is coming from commercial. Again, not a bad split given
how much newer their commercial offerings are and how fast they're growing overall.
Instead of looking at government versus commercial, we can also look at their
revenue concentration, so their biggest 20 client versus the rest. The average revenue
of their top 20 clients grew to 39 million dollars. Twenty times thirty nine million is
seven hundred and eighty million dollars. If we look add up Palantir's last 4 quarters of revenue
on Hypercharts, we get about 1 point 3 billion dollars. That means about 59% percent of their
revenue is coming from their top 20 clients. This is where I think the real risk is,
not the fact that their revenues are still largely government based. However, the more new deals
they sign with existing clients, the more Palantir proves how sticky they are. When I say sticky,
what I mean is how much their current clients stick with them and expand their business deals
as opposed to leaving. Their average revenue per top 20 customer reflects that, having increased
by a whopping 36% percent year over year. Their average revenue across all customers
also increased by 19% percent, year over year. So, overall, they're getting a lot more work
per customer, not just acquiring new customers. In fact, they booked $925 million dollars worth of
work this past quarter, up a whopping 175% percent from this time last year. Just for context,
their total revenue in 2020 was $1.1 billion dollars, so they booked 84% percent of last
years revenue in a single quarter. No matter how you slice it, Palantir's Q2 earnings were awesome
and I'm excited to see them keep up this kind of exponential growth.
The two questions I got the most in the comments of my previous Palantir video were about their
high amounts of stock-based compensation and their leadership team selling large amounts of stock,
so I'll talk about those now. Let's start with the stock-based compensation. Cathie Wood said
that she doesn't want the companies she holds to be profitable for the sake of catering to
short-term shareholders. Do we agree? I started crunching some numbers and then ran
into a great article on Seeking Alpha that shows a more interesting take than I was going to,
so I'd like to share that with you instead. The author of the article is Business Quant and I'll
link it in the description below. I'll add value by updating the numbers from this article so you
get the best of both worlds. The basic idea is that Palantir's stock-based compensation
expenses are disproportionately high and investors are avoiding the stock altogether because of it.
Because the stock options and units given as compensation increase the total share count,
they dilute existing shareholders. In fact, a few quarters ago, their stock based compensation was
3 times revenue. Holy moly. As of this latest quarter, stock-based compensation is still around
60% percent of their revenues for the trailing twelve months, significantly dragging down
profitability, and management not issuing any guidance on these compensations in the future.
So, first things first. In a world where people job hop a lot, stock-based compensation with long
vesting periods gives employees a reason to stay in one place for a good amount of time. More than
that, it literally keeps employees invested in the growth of the company because they have skin in
the game. So, these compensations are one way that Palantir and other high-growth companies
protect themselves from losing key employees and the knowledge they would leave with. Second,
Business Quant did something very clever in this article. They compared Palantir's revenue
growth and growth in compensation expenses to those of other software companies. The
x-axis here is percent revenue growth over the last two quarters and the y-axis is the
percent growth of stock-based compensation over the same time period. Last quarter,
when this analysis was done, Palantir's stock-based compensations actually fell the
most while they were one of the fastest-growing companies in the comparison. Let's add in
Palantir's most recent data. Palantir's new point should look like this: their revenue grew by
17% percent sequentially over the last 2 quarters, from 322 million dollars to 376 million dollars,
and their stock-based compensation fell from 242 million dollars to 232 million dollars, or 4%
percent. That's still way better than the middle of this pack; they're among the fastest growing
companies on this list and their stock-based compensation growth is below the median.
So, when you compare Palantir to fairly similar software companies, there's nothing really to
worry about. The other thing to point out here is that stock-based compensation takes time to vest,
so even though these shares are all locked in for employees right now, the dilution will
happen over the course of years. Now we have a real leg-up on people who don't realize this
is a normal part of a company's growth story, as all the dots on that plot suggest. I find
that people often overreact to dilution. So, when people sell their shares for dirt cheap based on
news of getting diluted, we can be mentally and financially prepared to take advantage.
Now let's talk about the insider selling. People seem to be worried about the leadership team
selling large amounts of the stock, specifically Alex Karp, the Palantir's CEO. So, let me point
out two things here that immediately made me stop worrying. First, Alex Karp still owns millions of
shares. He has 6 point 4 million shares of Class A stock and 32 point 5 million shares of Class
B common stock. If we count up all the shares he has access to, he has about 64 and a half
million shares, valued at $1 point 6 billion dollars. Nobody keeps such a massive position
when they don't have confidence in the future of the company. Second, there's a rule you should
be aware of. It's going to save you a LOT of heartache and it can make you a lot of money when
insider selling makes headlines. Rule 10b5-1 allows company insiders to set up a predetermined
plan to sell company stocks in accordance with insider trading laws. The price, amount,
and sales dates must be specified in advance and determined by a formula or metrics. Both the
seller and the broker making the sales must not have access to any material nonpublic information.
What this means is that any insider sell that happens as a result of this rule isn't controlled
by the insider. They set the criteria in advance and when it happens, it happens. If we go back to
Alex Karp's insider trading history for Palantir, guess what we see? Most of his trades fall under
this 10b5-1 rule. In fact, his latest trade that doesn't follow this rule is a buy on April 15th.
He does have a couple big sells at the end of the first quarter, but they're a drop in the
bucket compared to the amount of shares he still has today. Literally a fraction of a percent.
Okay, so Cathie Wood is confident in this company. The insiders are confident in this company.
Earnings were great no matter how you slice them. There's one more thing I want to talk about
and I saved the best for last. Palantir isn't just expanding down market with Foundry for Builders.
They're commercializing their Apollo platform. If you don't know what Apollo is, it's the platform
behind their platforms. It's the continuous integration, deployment, and control layer under
multiple installations of Gotham and Foundry that can send updates and patches to client systems,
even if they're on classified networks or on machines that won't send data back out.
If that sounded like a bunch of jargon and mumbo jumbo to you, think of it this way. If
Gotham and Foundry were a bunch of big buildings in a city, Apollo is the foundation and piping
and utility lines and roadways that run between them. Apollo is what allows Palantir to be one of
five companies authorized for Mission Critical National Security Systems (Impact Level 5) by
the U.S. Department of Defense. The other four companies are Oracle, Microsoft, Project Hosts,
and DISA - the Defense Information Systems Agency. This is a tiny list. The Apollo platform is going
to get Palantir into all sorts of businesses that usually have to develop these things
for themselves and the competition is less than a handful of companies. Seeing them say that they're
commercializing Apollo is a very big deal and will open a lot of doors to Palantir in the future,
especially if they can scale it down to just the essentials for smaller companies that want
just the core features. Again, think about how big the world of privileged and sensitive data
is beyond government systems: health records, financial records, secret projects inside big
tech companies, machine learning training data from sensors and robots, security data
like biometric information, and so on. If you put these all together, there's quite a large
market of networks with sensitive information on them for the Apollo platform to serve.
When it comes to Palantir, there's no shortage of crazy and awesome stuff to talk about.
If you're interested in learning more about what their products do, the services they provide,
and my moonshot for how they'll scale to a trillion dollar valuation, check out my deep dive
episode on that. I'll link it in the top right hand corner of your screen right now and in the
description below as well. I hope this episode you understand more about Palantir THE STOCK,
including their latest earnings report, as well as concerns about their stock-based compensations
and insiders selling shares. If it did, consider investing in the like button and subscribing to
the channel with all notifications turned on. That way, you'll be the first to know when I
drop my next episode on Palantir, where I'll focus on another thing that really surprised me;
Palantir is invested in TWELVE SPACs. Twelve! I was going to talk about them in this video
but... there's twelve of them. One of them is a robotic exoskeleton company that give the
wearer super-human strength. Another is doing some pretty cool stuff in the genomics space.
There's a lot to talk about and I'm excited to share it with you.
Until next time, this is ticker symbol you. My name is Alex, reminding you,
that the best investment you can make, is in you.