Palantir: Important Takeaways From Alex Karp At World Economic Forum (NYSE:PLTR)

At this year’s World Economic Forum, Palantir (NYSE:PLTR) co-founder and CEO Alex Karp continued to paint a gloomy picture for geopolitical and macroeconomic conditions for the world moving forward. He also shared insight into his view of PLTR stock’s fair value and addressed the company’s failed SPAC investment strategy. In this article we will look at these remarks and share the big takeaways for PLTR stock as we head into 2023.

Continued Geopolitical And Macroeconomic Gloom

Mr. Karp sustained his message of continued gloom for the global macroeconomic and geopolitical situation. Emphasizing that governments and companies will have to continue learning to adapt to a more challenging environment, he asserted that one reason for this will be ongoing conflict:

I don’t think the war is likely to end in Ukraine…you have an adversary who is zero sum.

He went on to share that – in addition to the fact that Putin’s life and legacy are directly tied to the outcome of the war in Ukraine – the West cannot allow Russia to win either because it believes that such an outcome would send the wrong message to other potential aggressors around the world such as Iran, North Korea, and China.

Given the ongoing challenges and threats posed to European, Middle Eastern, and Asian allies by geopolitical rivals such as Russia, Iran, China, and North Korea, PLTR’s products both present and future should remain in high demand. After seeing how much PLTR has helped Ukraine maximize the lethality of its inferior fighting force against a larger and more powerful Russian foe, we think countries like Taiwan, Japan, and Australia will become more drawn to PLTR’s Gotham platform to enhance their own military readiness against potential Chinese aggression in the region.

Furthermore, the United States military and its NATO allies are likely also becoming increasingly confident in PLTR’s capabilities through this experience and will therefore be more likely to sustain and expand their own demand for PLTR products in the future.

Another comment from Mr. Karp at the World Economic Forum that has meaningful implications for PLTR stock is:

Our clients are not in a war situation… but they must figure out how to survive under much harder conditions…they have to figure out what is a power point and what is a fraud.

He went on to elaborate that when times are good, demand is strong and capital is cheap and plentiful, data analytics products that look good on power point and have minimally robust true capability may be enough to accomplish what the company wants done. However, in the current environment with soaring interest rates and inflation as well as a high likelihood of a meaningful economic downturn hitting at some point in 2023, companies need to have the best data analytics products in order to fight these macro headwinds and sustain profitability as best they can.

This bodes well for PLTR’s Foundry business because it means that major companies will likely increasingly be leaning on PLTR’s data analytics capabilities to drive improved efficiencies in their businesses to fight inflationary headwinds while also optimizing sales during a time when demand may be slacking off. Data analytics are more important than ever today given that there is a stubbornly persistent labor shortage across most industries, so making employees more productive can help to offset the need for additional workers.

Alex Karp’s Thoughts On What PLTR Stock Is Worth

Mr. Karp was also pressed on his thoughts on PLTR stock’s valuation and what he thinks it is really worth. He went on to state:

We’ve been at this for almost 20 years. Our valuation has been very high and very low…over the medium term, valuations do reflect the health and success of a business…there are market conditions that effect the share price…There are legitimate concerns that we have to address: the dilution, what are the revenues going to be, where are the revenues going to develop, how transformative are the products going to be…all legitimate concerns…we believe our business is as strong as it has ever been…I never thought we were that good when our share price was $40, I didn’t think we were that bad when our share price was $6, or whatever it is.

Let’s unpack this. First of all, his reference to the stock price being very high and very low at different times due to market conditions is certainly believable. For example, shortly after the stock went public the share price shot up to nearly $40 per share:

However, this rapid surge in the stock price was almost entirely fueled by the cult-like support for high growth disruptive technology stocks found in Cathie Woods’ ARK Invest ETFs (ARKK), of which PLTR was one of the most popular. This mania was driven by a perfect storm of:

• Historically low interest rates that were near zero in order to support the economy in the wake of the COVID-19 lockdowns.
• Massive amounts of excess cash sloshing around in the economy due to heavy government stimulus payments, a decline in consumer spending due to the lockdowns, as well as significant unemployment benefits being provided by the government.
• The continued rise of retail investing, fueled by social media sites and the explosive growth of trading app use by millennials.

Since then, inflation has soared, leading interest rates to soar over the past year. The stimulus handouts have ended and the economy has re-opened, boosting demand for traditional businesses while removing some of the luster from futuristic but as of yet unprofitable tech businesses like PLTR. Finally, retail investing has taken a hit due to the bursting of the tech stock and crypto bubbles leading many millennials who flocked to retail trading to run for the hills and leave the stock market altogether.

As a result, PLTR’s stock has taken an epic hit along with the broader high growth speculative tech space since its peak in early 2021:

However, now that this sector is floundering so badly, Mr. Karp believes his stock is undervalued based on his comments at the WEF. Furthermore, it was refreshing to hear him admit that share dilution and the company’s path to achieving sustained robust long-term growth are legitimate concerns that must be addressed. His view is ultimately that the business is as strong as it has ever been and that in the coming years the company’s string of innovative, transformative software products will convince the market of that.

That said, while it is all well and good that says that they must address these “legitimate” shareholder concerns, he remained elusive on just how or when they plan to go about addressing them. PLTR stock is not in the doghouse because its products are not useful; it is in the doghouse because:

(1) the sector as a whole is

(2) the company continues to dilute shareholder value while showing no real progress towards GAAP profitability.

Yes, Mr. Karp made a brief and relatively vague comment on the Q2 earnings call that he expects PLTR to be profitable in 2025, but beyond that, the details to achieving it have been scarce and details on what the future stock dilution will look like are also scant. If PLTR really is serious about boosting its stock price, it will start with addressing these two major shareholder questions with some details.

The Failed SPAC Experiment

Further along on the profitability issue is PLTR’s failed SPAC experiment. In recent years PLTR had been pouring cash into equity investments in numerous SPACs. While this may have looked good at the time given that SPAC craze that was going on, it wound up backfiring as many of these companies got crushed when the tech stock bubble burst, resulting in significant destruction of shareholder value for PLTR investors.

Mr. Karp admitted that this approach was a mistake during his interview at the WEF, stating:

We are the world’s best at building software before people need the software. You make mistakes along the way. We made a mistake, we corrected it, we’ve moved on.

While it is good to hear him admit this failure of his, investors remain concerned about PLTR’s focus on creating value for shareholders given that PLTR’s aggressive investments in SPACs are only one of several questionable uses of shareholder capital. For example, PLTR poured tens of millions of dollars into buying gold bars and continues to pour immense sums of shareholder value into stock-based compensation for employees. PLTR even dangled the possibility of entering the crypto space on one of its earnings calls during the crypto bubble.

With such eclectic attention grabbing stunts like these, it brings into question the credibility of management as capital allocators. Sure, they can produce high quality software products that serve a mission-critical role for our national security, make our government agencies more effective, and help corporations improve operations and save millions of dollars over time. However, if management cannot concentrate its resources on what it does best, and instead continues to get sidetracked with ill-fated stunts like these, investors will have an even harder time trusting them and staying the course to see if the company can eventually reach profitability and bring stock dilution under control.

Investor Takeaway

PLTR continues to impact the world with its cutting edge data analytics software products. For evidence, simply look at what it has accomplished in Ukraine and is accomplishing across government agencies and corporations every day. With a total addressable market that is well above $100 billion and growing rapidly with no end in sight, the sky is truly the limit for this company.

They are investing aggressively in innovation and attracting the best and brightest in the industry to accomplish their ambitious goals. They enjoy a very strong U.S. government business and are accelerating their growth in the commercial sector.

With the Chinese and Russian threats to regional and global piece rising over the past year, their appeal to U.S. allies is likely growing and should be a tailwind for the government business, while ongoing macroeconomic challenges make them a more necessary component of major global corporations’ toolkit.

Last, but not least, the seriously depressed share price at levels below its direct listing makes it look like a pretty attractive long-term investment on a risk-adjusted basis given the company’s incredible potential.

That said, while management is finally beginning to acknowledge its need to address shareholder dilution and its path to profitability as legitimate shareholder concerns, more detail and – more importantly – concrete action and focused effort on improving its GAAP bottom line are required in order to earn shareholder trust.

I remain bullish and long PLTR, but continue to view it as a highly speculative bet until management can prove itself to be a more reliable allocator of capital.