Palantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss

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Palantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss

Seeking Alpha2024-12-26

SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and ...

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Snoopymint
·2024-12-26
Great analysis.
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Ahvi
·2024-12-26
Excellent analysis that doesn't just blindly quote PE ratios
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However, it is undervalued using market implied discount rates.I maintain a hold rating for Palantir, as the business remains robust despite the anticipated negative Q4 catalyst and current overvaluation.Since I first initiated a buy rating for Palantir Technologies, the stock has returned 371% against ~20% of the S&P 500. Typically, my investment approach ignores pricing altogether and does not focus on looking at charts or pricing metrics such as price-to-earnings or price-to-sales. It also ignores estimates by other analysts. I research businesses, value them, and base my decisions on derived fair intrinsic value.However, while Palantir is one of the most robust businesses that I have ever studied, the abnormal outperformance has made me make an exception to my typical investment philosophy. There is a disclosure in the 10Q SEC filing for the third quarter that will see Palantir take a big hit to its EPS, something Wall Street analysts have not accounted for when I review their estimates. This will mean that Palantir will miss EPS by ~90%, assuming Palantir only meets Wall Street consensus estimates.I have already reviewed Palantir's Q3 earnings in a separate article, and at the time, the conditions were not met in order for the disclosure to be meaningful; therefore, I saw no need to mention it. However, the stock has surged since then, and is now meeting the criteria.This article will not focus on details surrounding the business. For that, I would refer you to my previous Palantir articles. This article will discuss the current Palantir stock quote pertaining to the company's pricing and valuation.Stock Appreciation Rights (SARs)Many investors are familiar with stock-based compensation (SBC), a common means to compensate employees and attract talent. However, not many are familiar with all the intricacies of the different types of stock-based compensation. Palantir offers several types of SBC to their employees, but there is one specific type in particular that surfaced in 2024, SARs.Palantir stock-based compensationEmir Mulahalilovic, Palantir Technology filingsThe chart shows Palantir's reported total unrecognized stock-based compensation expense by type. As of Q3, there is a new entry: Accelerated SARs due to market conditions. This is the entry that I want us to focus on, and it is found on page 17 of Palantir's 10Q filing for the third quarter of 2024, it reads:Of the total SARs outstanding, $119.7 million of unrecognized expense would be accelerated if the market condition related to Market-Vesting SARs is achieved earlier than its derived service period.First, what are stock appreciation rights?It's a type of employee compensation that is based on the increase in the company's stock price over a set period and is unlocked within a set stock price range.Investors may confuse this with performance-based restricted stock units (RSUs), but there's a difference. SARs reward employees only if the stock price itself rises, while performance RSUs reward employees if the company meets specific performance objectives, regardless of how much the stock price has appreciated.The weighted average fair value for the SARs that have been issued is $50 per share, with a maximum appreciation of $20. In short, the window for the SARs to unlock is above $50, but the fully appreciated amount is $70, meaning beyond $70, there is no reason not to exercise them. At the time of writing my last article, Palantir was trading at $55; it's now at $80, meaning all eligible SARs should already have been exercised, as there is no point in waiting for further stock appreciation.Now let's reel it back to the new Q3 entry, the accelerated SARs due to market conditions. There are two types of SARs: market-vesting SARs which are solely based on the stock price and time-vesting SARs, which become available over a service period of up to nine years in Palantir's case. Even though Palantir is trading beyond $70, not all SARs are eligible to be exercised, only the market-vesting ones. In this case, as Palantir has filed, the outstanding expense associated with these being exercised is $119.70 million, or $120 million rounded. This will directly impact net income, something that Wall Street analysts are not taking into account for their Q4 EPS estimates.Wall Street analysts are not taking SARs into account for their estimatesLooking at Seeking Alpha's consolidated estimates for the fourth quarter, not a single analyst has revised down their EPS estimates. Rather, 12 analysts have revised their estimates to the upside.At the time of writing, the consensus estimate is $0.5 of earnings per share per GAAP. Meanwhile, the revenue estimates are $776.78 million. I won't bring my own assumptions into this exercise in order for us to get a clear grasp on what Wall Street analysts are implying. I assume 1.5% of share dilution quarter over quarter (Q/Q) in order to stay consistent with the dilution of the past quarter in 2024. That leaves us with ~$130 million of net income attributable to common stockholders, thus creating an EPS of $0.5 per share as per the estimates. In a chart, it looks like this:Palantir net income and marginsEmir Mulahalilovic, Palantir filings, Seeking AlphaWith the $120 million SARs impact on net income, Palantir would only record $10 million of net income attributable to common stockholders using the Wall Street estimates. That would look like this:Palantir net income with SARs impactEmir Mulahalilovic, Palantir filings, Seeking AlphaThat leaves us with an EPS of $0.004 per share, implying an EPS miss of 92%.There is also the possibility that all Wall Street analysts are aware of the SARs and have accounted for that. That would imply that Palantir will record $250 million of net income for the fourth quarter before applying SARs expenses, which would catapult the margins from ~20% in the past two quarters to 32%:Palantir net income assuming SARs accountabilityEmir Mulahalilovic, Palantir filings, Seeking AlphaExpensive does not mean overvaluedFor those familiar with my articles on Seeking Alpha, you will find me not paying any attention to stock charts or any pricing metrics. I am an investor who only looks at intrinsic value for a business, and as such, pricing metrics do not properly capture the dynamics of growth, cash flows, and risk, which are essential to deriving intrinsic value. However, I'll make a rare exception to that today because it ties into the topic of the article.Palantir historical P/E and P/SEmir MulahalilovicMost investors will note that Palantir is trading at expensive pricing, citing price-to-earnings (P/E) ratios or price-to-sales (P/S) ratios being far above peers at 75 P/S and 406 P/E. It is completely reasonable to adopt an investment approach where one is wary of expensive pricing, but it is not my approach. I value businesses, and for a company like Palantir that is at chapter 5 of a 35-chapter book, there are still a lot of ways the story can diverge. I deem most of Palantir's intrinsic value as terminal, meaning beyond even my projection periods, and that will never be captured using pricing metrics.I commonly see large media and investors refer to P/E or P/S when talking about a stock trading over or undervalued. This is not correct in my opinion, as P/E and P/S are references to the price of a stock and not the value of the business. A valuation to me is an assessment and projection of future business performance discounted back to present value by looking at growth, cash flows, and the associated risk. The output of such an assessment is intrinsic value and dates back centuries. Professor Aswath Damodaran of NYU Stern often illustrates the timeless nature of intrinsic valuation by referencing a Venetian glassmaker from the 1500s. He notes that even back then, the decision to buy a business was based on fundamental principles akin to modern intrinsic valuation—assessing cash flows, growth prospects, and inherent risks. The core of valuation has always been about understanding cash in, cash out, and how these are affected by growth and risk.A stock can trade expensively and be undervalued; similarly, it can trade cheaply and be overvalued. The two terms, pricing and valuation, are not synonymous. To illustrate my point, I have overlaid my own intrinsic valuation for Palantir as per my quarterly articles on Seeking Alpha against the stock price, and next to it, you can see the pricing metrics. There were periods when Palantir was considered undervalued by me while the P/E and P/S ratios were undoubtedly expensive.Palantir P/S and P/E vs stock price and valuationEmir MulahalilovicI don't mean to say that one approach to investing is superior to the other; I only mean that they are different. My investment approach allowed me to lay bare my thesis and story for Palantir along with my intrinsic valuation models, netting almost a 400% increase since my first article. That wouldn't have been possible if I had been scared away by the high P/E and P/S ratios throughout the year.Valuation and what the stock impliesI don't need to write many words to convince you that a P/S ratio of 75 and a P/E of 406 are expensive. For those who are interested, the current price-to-free cash flow ratio is 229. However, we are also at a point in time where I consider Palantir to be overvalued.A valuation is a reflection of the story you tell for a company. To be able to tell the story, you need to understand the business; you should be able to explain where each number in a valuation model comes from. Since we make assumptions for future performance, one's understanding of the business is correlated to the accuracy of the valuation. We will never be precise; all we can strive to do is to be as accurate as possible given the information available to us.My story for Palantir is told in previous articles in a lot of detail, but I will provide a summary. I adopt a sum-of-the-parts approach to valuing Palantir, as it has two distinct business segments: commercial and government. These segments are distinctly different in their growth drivers.For the government business, I tie my projections to the Department of Defense budget forecast. Historically, I have calculated Palantir to roughly bring in 75% of its government revenue in the U.S. from the Department of Defense (DoD). I then look at how much of the DoD budget goes towards AI, which is a bit difficult because it is not always clear what constitutes AI spending and what doesn't. CEO Alex Karp of Palantir has been quoted stating that 0.5% of the DoD budget goes toward AI, and he has also been quoted to stating that 0.2% of the budget goes toward AI. My findings align more with the 0.5% figure, which is the assumption I use. I then see an increasing amount of DoD spending going towards AI over the coming periods, going from 0.5% in 2023 to 5.5% in 2034, a 0.5% incremental increase per period.The reason I normalize the increase is because government spending tends to be very lumpy, both in the U.S. and globally. I have compiled all the contract awards to Palantir dating back to 2009, illustrating the lumpiness.Palantir government contract based awardsEmir Mulahalilovic, USAspending.govCumulatively over the same period, dating back to 2009, here is what the distribution looks like across different agencies:Palantir government agency distribution for awardsEmir Mulahalilovic, USAspending.govCumulatively, the DoD makes up 52% of all contract-based awards. This does not account for all the different types of awards, including the kind pertaining to indefinite delivery and indefinite quantity (IDIQ), which skews the statistics as it's very common within the DoD. For the most recent periods, the DoD makes up roughly 70-80% of the contract awards.For the commercial segment, it's a more simple approach where the growth is tied to the projected AI software market, where I see Palantir taking an increasingly larger share over the periods.Palantir is very capital-light and does not require much reinvestment in order to grow. As I have covered in my previous articles, the customer acquisition costs associated with increased revenue growth with more or less static expenses will drive fantastic margins. With the way their customers scale, with a very efficient go-to-market strategy using boot camps, and with strong network effects, I see Palantir reaching ~48% free cash flow to the firm margins by 2034.Palantir DCF modelEmir Mulahalilovic, Palantir filingsThese assumptions leave me with a 31.6% compounded annual growth rate (CAGR) through 2034 and a fair intrinsic value of ~$55 per share. That implies a -32% downside to fair intrinsic value from the current stock quote, or, in simple terms, it's very overvalued using my story for the company.So, what is the stock price actually implying? It is possible to do a reverse discounted cash flow model (DCF) in order to gauge what the market is implying that Palantir will perform. A typical DCF starts with the assumptions and derives an output; a reverse DCF starts with the output and works backward to find the inputs necessary to reach the output. It is not a source of truth but gives us a rough estimate of what Palantir needs to do in order to be fairly valued at the current quote of $80.When doing a reverse DCF, I find it important to leave as many subjective assumptions out of the model as possible. Because of this, I compose my discount rate by using market-implied variables: the risk-free rate and the implied equity risk premium for the month of December, calculated by Aswath Damodaran. Then it is prudent to include company-specific risk, so I have kept the 1.8% from my own valuation model. I also use the risk-free rate as a proxy for the terminal growth rate, as the risk-free rate contains economic implications. I'll also assume 35% free cash flow to the firm margins for each period.Palantir reverse DCFEmir MulahalilovicIn order for Palantir to justify an $80 per share price per intrinsic valuation, Palantir would have to grow at a 42% CAGR through 2033. That means that Palantir would need to do $74 billion (from a base of $2.2 billion in 2023) of revenue in 2033 as well as $26 billion of free cash flow. As a reference, $74 billion in revenue is 503% higher than the current Wall Street consensus as per Seeking Alpha's consolidated estimates.I can't tell a credible story where Palantir compounds at 42% per period for the next 9.25 periods with the information that is currently available about the business.However, sticking to my own story and only using market implications for the discount rate composition, Palantir is actually slightly undervalued. This approach is not as crazy as one might think, even though it is not my approach, as I find it important to introduce company-specific risk.Palantir DCF ModelEmir MulahalilovicThe risk-free rate is a key component, as that is the current yield available to us, risk-free. The implied equity risk premium is what investors charge in order to take on the risk of investing in equities. If I offered you an investment in the risk-free rate at 4.5%, which is the current yield, or equity with an expected return of 4.5% but with inherent risk, you would always choose the risk-free alternative. The implied equity risk premium is a calculation to solve for how much investors are charging in addition to the risk-free rate in order to take on the risk of equities. Aswath Damodaran calculates this monthly on his blog, where he uses the current market price of an equity index, the expected cash flows, and expected growth rates to find what the implied equity risk premium is at a given time.SummaryPalantir has been trading at a premium both in terms of pricing as well as valuation for an extended period of time. Throughout the year, Palantir has been expensive, but I have simultaneously found it undervalued at times and written articles with buy ratings. Trading at a premium also means that the company and stock are under heavy scrutiny. Palantir has been executing and performing; there have not been many negative narratives to latch on to for bears. However, there is one major headline coming for the Q4 results that not many are aware of.The market-vested SARs that fully appreciated once Palantir's stock traded above $70 have likely been executed as there is no merit to wait any further, meaning that Palantir will incur a $120 million stock-based compensation expense in Q4, hitting the net income and EPS. The outstanding SAR expenses and the vesting conditions are publicly available in Palantir's 10Q filing for Q3, yet no Wall Street analyst has accounted for it in their GAAP estimates. This means that assuming Wall Street would be accurate in their original estimates, Palantir will miss EPS by ~90%. Headlining such a miss for Q4 may be what sends Palantir on a long-awaited correction.As an investor who focuses strictly on intrinsic valuation and not pricing, such an event is not enough for me to sell a high-quality business such as Palantir. I strive to only sell companies of such pristine caliber only if my business thesis starts to deteriorate, which is not the case for Palantir. Depending on one's approach to intrinsic valuation, one could argue that Palantir is actually fairly valued without adjusting my projections. With this in mind, I will keep my hold rating for Palantir despite the upcoming negative catalyst to the stock and despite Palantir trading overvalued; it is just too strong of a business for me to sell without anything tangible that may disrupt this juggernaut of a business.","kind":"news","is_publish_news":true,"is_publish_highlight":true,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[{"id":385789535691184,"gmtCreate":1735227540874,"gmtModify":1735227685221,"author":{"id":"3583366743540214","authorId":"3583366743540214","name":"Snoopymint","avatar":"https://static.tigerbbs.com/7c23b9b28062a0e2d82ce3ce492a6a83","vip":1,"crmLevel":6,"crmLevelSwitch":0,"idStr":"3583366743540214","authorIdStr":"3583366743540214"},"htmlText":"Great analysis.&nbsp;","listText":"Great analysis.&nbsp;","text":"Great analysis.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/385789535691184","repostId":1192055926,"repostType":2,"repost":{"id":"1192055926","kind":"news","pubTimestamp":1735214373,"share":"https://ttm.financial/m/news/1192055926?lang=&edition=fundamental","pubTime":"2024-12-26 19:59","market":"us","language":"en","title":"Palantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss","url":"https://stock-news.laohu8.com/highlight/detail?id=1192055926","media":"Seeking Alpha","summary":"SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and invest","content":"<html><head></head><body><h2 id=\"id_2625158676\">Summary</h2><ul style=\"\"><li><p>An upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.</p></li><li><p>The stock being expensive does not mean that it is overvalued, and investors too fixated on P/S ratios would have missed the remarkable Palantir gains.</p></li><li><p>My current fair intrinsic value for the business is $55 per share, implying a -32% downside. However, it is undervalued using market implied discount rates.</p></li><li><p>I maintain a hold rating for Palantir, as the business remains robust despite the anticipated negative Q4 catalyst and current overvaluation.</p></li></ul><p>Since I first initiated a buy rating for <a href=\"https://laohu8.com/S/PLTR\">Palantir Technologies</a>, the stock has returned 371% against ~20% of the S&amp;P 500. Typically, my investment approach ignores pricing altogether and does not focus on looking at charts or pricing metrics such as price-to-earnings or price-to-sales. It also ignores estimates by other analysts. I research businesses, value them, and base my decisions on derived fair intrinsic value.</p><p>However, while Palantir is one of the most robust businesses that I have ever studied, the abnormal outperformance has made me make an exception to my typical investment philosophy. There is a disclosure in the 10Q SEC filing for the third quarter that will see Palantir take a big hit to its EPS, something Wall Street analysts have not accounted for when I review their estimates. This will mean that Palantir will miss EPS by ~90%, assuming Palantir only meets Wall Street consensus estimates.</p><p>I have already reviewed Palantir&#39;s Q3 earnings in a separate article, and at the time, the conditions were not met in order for the disclosure to be meaningful; therefore, I saw no need to mention it. However, the stock has surged since then, and is now meeting the criteria.</p><p>This article will not focus on details surrounding the business. For that, I would refer you to my previous Palantir articles. This article will discuss the current Palantir stock quote pertaining to the company&#39;s pricing and valuation.</p><h2 id=\"id_2220283489\">Stock Appreciation Rights (SARs)</h2><p>Many investors are familiar with stock-based compensation (SBC), a common means to compensate employees and attract talent. However, not many are familiar with all the intricacies of the different types of stock-based compensation. Palantir offers several types of SBC to their employees, but there is one specific type in particular that surfaced in 2024, SARs.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/336e248deebe429c83043881ad322df9\" alt=\"Palantir stock-based compensation\" title=\"Palantir stock-based compensation\" tg-width=\"640\" tg-height=\"313\"/><span>Palantir stock-based compensation</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir Technology filings</p><p>The chart shows Palantir&#39;s reported total unrecognized stock-based compensation expense by type. As of Q3, there is a new entry: Accelerated SARs due to market conditions. This is the entry that I want us to focus on, and it is found on page 17 of Palantir&#39;s 10Q filing for the third quarter of 2024, it reads:</p><blockquote><p>Of the total SARs outstanding, $119.7 million of unrecognized expense would be accelerated if the market condition related to Market-Vesting SARs is achieved earlier than its derived service period.</p></blockquote><p>First, what are stock appreciation rights?</p><p>It&#39;s a type of employee compensation that is based on the increase in the company&#39;s stock price over a set period and is unlocked within a set stock price range.</p><p>Investors may confuse this with performance-based restricted stock units (RSUs), but there&#39;s a difference. SARs reward employees only if the stock price itself rises, while performance RSUs reward employees if the company meets specific performance objectives, regardless of how much the stock price has appreciated.</p><p>The weighted average fair value for the SARs that have been issued is $50 per share, with a maximum appreciation of $20. In short, the window for the SARs to unlock is above $50, but the fully appreciated amount is $70, meaning beyond $70, there is no reason not to exercise them. At the time of writing my last article, Palantir was trading at $55; it&#39;s now at $80, meaning all eligible SARs should already have been exercised, as there is no point in waiting for further stock appreciation.</p><p>Now let&#39;s reel it back to the new Q3 entry, the accelerated SARs due to market conditions. There are two types of SARs: market-vesting SARs which are solely based on the stock price and time-vesting SARs, which become available over a service period of up to nine years in Palantir&#39;s case. Even though Palantir is trading beyond $70, not all SARs are eligible to be exercised, only the market-vesting ones. In this case, as Palantir has filed, the outstanding expense associated with these being exercised is $119.70 million, or $120 million rounded. This will directly impact net income, something that Wall Street analysts are not taking into account for their Q4 EPS estimates.</p><h2 id=\"id_3994758123\">Wall Street analysts are not taking SARs into account for their estimates</h2><p>Looking at Seeking Alpha&#39;s consolidated estimates for the fourth quarter, not a single analyst has revised down their EPS estimates. Rather, 12 analysts have revised their estimates to the upside.</p><p>At the time of writing, the consensus estimate is $0.5 of earnings per share per GAAP. Meanwhile, the revenue estimates are $776.78 million. I won&#39;t bring my own assumptions into this exercise in order for us to get a clear grasp on what Wall Street analysts are implying. I assume 1.5% of share dilution quarter over quarter (Q/Q) in order to stay consistent with the dilution of the past quarter in 2024. That leaves us with ~$130 million of net income attributable to common stockholders, thus creating an EPS of $0.5 per share as per the estimates. In a chart, it looks like this:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/2c8fb7a101ad3fac2e874ac14eb75765\" alt=\"Palantir net income and margins\" title=\"Palantir net income and margins\" tg-width=\"640\" tg-height=\"316\"/><span>Palantir net income and margins</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings, Seeking Alpha</p><p>With the $120 million SARs impact on net income, Palantir would only record $10 million of net income attributable to common stockholders using the Wall Street estimates. That would look like this:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/baa80a14d4949b10ddebb527c1f87a42\" alt=\"Palantir net income with SARs impact\" title=\"Palantir net income with SARs impact\" tg-width=\"640\" tg-height=\"314\"/><span>Palantir net income with SARs impact</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings, Seeking Alpha</p><p>That leaves us with an EPS of $0.004 per share, implying an EPS miss of 92%.</p><p>There is also the possibility that all Wall Street analysts are aware of the SARs and have accounted for that. That would imply that Palantir will record $250 million of net income for the fourth quarter before applying SARs expenses, which would catapult the margins from ~20% in the past two quarters to 32%:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/b9262bd35a5759639cb30d80421b9333\" alt=\"Palantir net income assuming SARs accountability\" title=\"Palantir net income assuming SARs accountability\" tg-width=\"640\" tg-height=\"315\"/><span>Palantir net income assuming SARs accountability</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings, Seeking Alpha</p><h2 id=\"id_3521161590\">Expensive does not mean overvalued</h2><p>For those familiar with my articles on Seeking Alpha, you will find me not paying any attention to stock charts or any pricing metrics. I am an investor who only looks at intrinsic value for a business, and as such, pricing metrics do not properly capture the dynamics of growth, cash flows, and risk, which are essential to deriving intrinsic value. However, I&#39;ll make a rare exception to that today because it ties into the topic of the article.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/abf609eb57d279bd4eeb72ec4905ae62\" alt=\"Palantir historical P/E and P/S\" title=\"Palantir historical P/E and P/S\" tg-width=\"640\" tg-height=\"309\"/><span>Palantir historical P/E and P/S</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>Most investors will note that Palantir is trading at expensive pricing, citing price-to-earnings (P/E) ratios or price-to-sales (P/S) ratios being far above peers at 75 P/S and 406 P/E. It is completely reasonable to adopt an investment approach where one is wary of expensive pricing, but it is not my approach. I value businesses, and for a company like Palantir that is at chapter 5 of a 35-chapter book, there are still a lot of ways the story can diverge. I deem most of Palantir&#39;s intrinsic value as terminal, meaning beyond even my projection periods, and that will never be captured using pricing metrics.</p><p>I commonly see large media and investors refer to P/E or P/S when talking about a stock trading over or undervalued. This is not correct in my opinion, as P/E and P/S are references to the price of a stock and not the value of the business. A valuation to me is an assessment and projection of future business performance discounted back to present value by looking at growth, cash flows, and the associated risk. The output of such an assessment is intrinsic value and dates back centuries. Professor Aswath Damodaran of NYU Stern often illustrates the timeless nature of intrinsic valuation by referencing a Venetian glassmaker from the 1500s. He notes that even back then, the decision to buy a business was based on fundamental principles akin to modern intrinsic valuation—assessing cash flows, growth prospects, and inherent risks. The core of valuation has always been about understanding cash in, cash out, and how these are affected by growth and risk.</p><p>A stock can trade expensively and be undervalued; similarly, it can trade cheaply and be overvalued. The two terms, pricing and valuation, are not synonymous. To illustrate my point, I have overlaid my own intrinsic valuation for Palantir as per my quarterly articles on Seeking Alpha against the stock price, and next to it, you can see the pricing metrics. There were periods when Palantir was considered undervalued by me while the P/E and P/S ratios were undoubtedly expensive.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/abb91f34bc65dc43051f0bddf9269809\" alt=\"Palantir P/S and P/E vs stock price and valuation\" title=\"Palantir P/S and P/E vs stock price and valuation\" tg-width=\"640\" tg-height=\"353\"/><span>Palantir P/S and P/E vs stock price and valuation</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>I don&#39;t mean to say that one approach to investing is superior to the other; I only mean that they are different. My investment approach allowed me to lay bare my thesis and story for Palantir along with my intrinsic valuation models, netting almost a 400% increase since my first article. That wouldn&#39;t have been possible if I had been scared away by the high P/E and P/S ratios throughout the year.</p><h2 id=\"id_1973629588\">Valuation and what the stock implies</h2><p>I don&#39;t need to write many words to convince you that a P/S ratio of 75 and a P/E of 406 are expensive. For those who are interested, the current price-to-free cash flow ratio is 229. However, we are also at a point in time where I consider Palantir to be overvalued.</p><p>A valuation is a reflection of the story you tell for a company. To be able to tell the story, you need to understand the business; you should be able to explain where each number in a valuation model comes from. Since we make assumptions for future performance, one&#39;s understanding of the business is correlated to the accuracy of the valuation. We will never be precise; all we can strive to do is to be as accurate as possible given the information available to us.</p><p>My story for Palantir is told in previous articles in a lot of detail, but I will provide a summary. I adopt a sum-of-the-parts approach to valuing Palantir, as it has two distinct business segments: commercial and government. These segments are distinctly different in their growth drivers.</p><p>For the government business, I tie my projections to the Department of Defense budget forecast. Historically, I have calculated Palantir to roughly bring in 75% of its government revenue in the U.S. from the Department of Defense (DoD). I then look at how much of the DoD budget goes towards AI, which is a bit difficult because it is not always clear what constitutes AI spending and what doesn&#39;t. CEO Alex Karp of Palantir has been quoted stating that 0.5% of the DoD budget goes toward AI, and he has also been quoted to stating that 0.2% of the budget goes toward AI. My findings align more with the 0.5% figure, which is the assumption I use. I then see an increasing amount of DoD spending going towards AI over the coming periods, going from 0.5% in 2023 to 5.5% in 2034, a 0.5% incremental increase per period.</p><p>The reason I normalize the increase is because government spending tends to be very lumpy, both in the U.S. and globally. I have compiled all the contract awards to Palantir dating back to 2009, illustrating the lumpiness.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/4c14e856be912a3fc92863dffcdad79b\" alt=\"Palantir government contract based awards\" title=\"Palantir government contract based awards\" tg-width=\"640\" tg-height=\"318\"/><span>Palantir government contract based awards</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, USAspending.gov</p><p>Cumulatively over the same period, dating back to 2009, here is what the distribution looks like across different agencies:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/07dcb6a2d87327db4814361599a23812\" alt=\"Palantir government agency distribution for awards\" title=\"Palantir government agency distribution for awards\" tg-width=\"640\" tg-height=\"313\"/><span>Palantir government agency distribution for awards</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, USAspending.gov</p><p>Cumulatively, the DoD makes up 52% of all contract-based awards. This does not account for all the different types of awards, including the kind pertaining to indefinite delivery and indefinite quantity (IDIQ), which skews the statistics as it&#39;s very common within the DoD. For the most recent periods, the DoD makes up roughly 70-80% of the contract awards.</p><p>For the commercial segment, it&#39;s a more simple approach where the growth is tied to the projected AI software market, where I see Palantir taking an increasingly larger share over the periods.</p><p>Palantir is very capital-light and does not require much reinvestment in order to grow. As I have covered in my previous articles, the customer acquisition costs associated with increased revenue growth with more or less static expenses will drive fantastic margins. With the way their customers scale, with a very efficient go-to-market strategy using boot camps, and with strong network effects, I see Palantir reaching ~48% free cash flow to the firm margins by 2034.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/1358cd74d64e9aa315adcd2a600a1486\" alt=\"Palantir DCF model\" title=\"Palantir DCF model\" tg-width=\"640\" tg-height=\"328\"/><span>Palantir DCF model</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings</p><p>These assumptions leave me with a 31.6% compounded annual growth rate (CAGR) through 2034 and a fair intrinsic value of ~$55 per share. That implies a -32% downside to fair intrinsic value from the current stock quote, or, in simple terms, it&#39;s very overvalued using my story for the company.</p><p>So, what is the stock price actually implying? It is possible to do a reverse discounted cash flow model (DCF) in order to gauge what the market is implying that Palantir will perform. A typical DCF starts with the assumptions and derives an output; a reverse DCF starts with the output and works backward to find the inputs necessary to reach the output. It is not a source of truth but gives us a rough estimate of what Palantir needs to do in order to be fairly valued at the current quote of $80.</p><p>When doing a reverse DCF, I find it important to leave as many subjective assumptions out of the model as possible. Because of this, I compose my discount rate by using market-implied variables: the risk-free rate and the implied equity risk premium for the month of December, calculated by Aswath Damodaran. Then it is prudent to include company-specific risk, so I have kept the 1.8% from my own valuation model. I also use the risk-free rate as a proxy for the terminal growth rate, as the risk-free rate contains economic implications. I&#39;ll also assume 35% free cash flow to the firm margins for each period.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/8cad10c02f681bf5248d2f6a1a9f7fe3\" alt=\"Palantir reverse DCF\" title=\"Palantir reverse DCF\" tg-width=\"640\" tg-height=\"279\"/><span>Palantir reverse DCF</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>In order for Palantir to justify an $80 per share price per intrinsic valuation, Palantir would have to grow at a 42% CAGR through 2033. That means that Palantir would need to do $74 billion (from a base of $2.2 billion in 2023) of revenue in 2033 as well as $26 billion of free cash flow. As a reference, $74 billion in revenue is 503% higher than the current Wall Street consensus as per Seeking Alpha&#39;s consolidated estimates.</p><p>I can&#39;t tell a credible story where Palantir compounds at 42% per period for the next 9.25 periods with the information that is currently available about the business.</p><p>However, sticking to my own story and only using market implications for the discount rate composition, Palantir is actually slightly undervalued. This approach is not as crazy as one might think, even though it is not my approach, as I find it important to introduce company-specific risk.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/999e5a332efbdc670584be65694f25bc\" alt=\"Palantir DCF Model\" title=\"Palantir DCF Model\" tg-width=\"640\" tg-height=\"329\"/><span>Palantir DCF Model</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>The risk-free rate is a key component, as that is the current yield available to us, risk-free. The implied equity risk premium is what investors charge in order to take on the risk of investing in equities. If I offered you an investment in the risk-free rate at 4.5%, which is the current yield, or equity with an expected return of 4.5% but with inherent risk, you would always choose the risk-free alternative. The implied equity risk premium is a calculation to solve for how much investors are charging in addition to the risk-free rate in order to take on the risk of equities. Aswath Damodaran calculates this monthly on his blog, where he uses the current market price of an equity index, the expected cash flows, and expected growth rates to find what the implied equity risk premium is at a given time.</p><h2 id=\"id_2660013685\">Summary</h2><p>Palantir has been trading at a premium both in terms of pricing as well as valuation for an extended period of time. Throughout the year, Palantir has been expensive, but I have simultaneously found it undervalued at times and written articles with buy ratings. Trading at a premium also means that the company and stock are under heavy scrutiny. Palantir has been executing and performing; there have not been many negative narratives to latch on to for bears. However, there is one major headline coming for the Q4 results that not many are aware of.</p><p>The market-vested SARs that fully appreciated once Palantir&#39;s stock traded above $70 have likely been executed as there is no merit to wait any further, meaning that Palantir will incur a $120 million stock-based compensation expense in Q4, hitting the net income and EPS. The outstanding SAR expenses and the vesting conditions are publicly available in Palantir&#39;s 10Q filing for Q3, yet no Wall Street analyst has accounted for it in their GAAP estimates. This means that assuming Wall Street would be accurate in their original estimates, Palantir will miss EPS by ~90%. Headlining such a miss for Q4 may be what sends Palantir on a long-awaited correction.</p><p>As an investor who focuses strictly on intrinsic valuation and not pricing, such an event is not enough for me to sell a high-quality business such as Palantir. I strive to only sell companies of such pristine caliber only if my business thesis starts to deteriorate, which is not the case for Palantir. Depending on one&#39;s approach to intrinsic valuation, one could argue that Palantir is actually fairly valued without adjusting my projections. With this in mind, I will keep my hold rating for Palantir despite the upcoming negative catalyst to the stock and despite Palantir trading overvalued; it is just too strong of a business for me to sell without anything tangible that may disrupt this juggernaut of a business.</p></body></html>","source":"lsy1728464409321","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Palantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPalantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-12-26 19:59 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4746468-palantir-upcoming-sars-expense-could-cause-significant-eps-miss><strong>Seeking Alpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and ...</p>\n\n<a href=\"https://seekingalpha.com/article/4746468-palantir-upcoming-sars-expense-could-cause-significant-eps-miss\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"PLTR":"Palantir Technologies Inc."},"source_url":"https://seekingalpha.com/article/4746468-palantir-upcoming-sars-expense-could-cause-significant-eps-miss","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1192055926","content_text":"SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and investors too fixated on P/S ratios would have missed the remarkable Palantir gains.My current fair intrinsic value for the business is $55 per share, implying a -32% downside. However, it is undervalued using market implied discount rates.I maintain a hold rating for Palantir, as the business remains robust despite the anticipated negative Q4 catalyst and current overvaluation.Since I first initiated a buy rating for Palantir Technologies, the stock has returned 371% against ~20% of the S&P 500. Typically, my investment approach ignores pricing altogether and does not focus on looking at charts or pricing metrics such as price-to-earnings or price-to-sales. It also ignores estimates by other analysts. I research businesses, value them, and base my decisions on derived fair intrinsic value.However, while Palantir is one of the most robust businesses that I have ever studied, the abnormal outperformance has made me make an exception to my typical investment philosophy. There is a disclosure in the 10Q SEC filing for the third quarter that will see Palantir take a big hit to its EPS, something Wall Street analysts have not accounted for when I review their estimates. This will mean that Palantir will miss EPS by ~90%, assuming Palantir only meets Wall Street consensus estimates.I have already reviewed Palantir's Q3 earnings in a separate article, and at the time, the conditions were not met in order for the disclosure to be meaningful; therefore, I saw no need to mention it. However, the stock has surged since then, and is now meeting the criteria.This article will not focus on details surrounding the business. For that, I would refer you to my previous Palantir articles. This article will discuss the current Palantir stock quote pertaining to the company's pricing and valuation.Stock Appreciation Rights (SARs)Many investors are familiar with stock-based compensation (SBC), a common means to compensate employees and attract talent. However, not many are familiar with all the intricacies of the different types of stock-based compensation. Palantir offers several types of SBC to their employees, but there is one specific type in particular that surfaced in 2024, SARs.Palantir stock-based compensationEmir Mulahalilovic, Palantir Technology filingsThe chart shows Palantir's reported total unrecognized stock-based compensation expense by type. As of Q3, there is a new entry: Accelerated SARs due to market conditions. This is the entry that I want us to focus on, and it is found on page 17 of Palantir's 10Q filing for the third quarter of 2024, it reads:Of the total SARs outstanding, $119.7 million of unrecognized expense would be accelerated if the market condition related to Market-Vesting SARs is achieved earlier than its derived service period.First, what are stock appreciation rights?It's a type of employee compensation that is based on the increase in the company's stock price over a set period and is unlocked within a set stock price range.Investors may confuse this with performance-based restricted stock units (RSUs), but there's a difference. SARs reward employees only if the stock price itself rises, while performance RSUs reward employees if the company meets specific performance objectives, regardless of how much the stock price has appreciated.The weighted average fair value for the SARs that have been issued is $50 per share, with a maximum appreciation of $20. In short, the window for the SARs to unlock is above $50, but the fully appreciated amount is $70, meaning beyond $70, there is no reason not to exercise them. At the time of writing my last article, Palantir was trading at $55; it's now at $80, meaning all eligible SARs should already have been exercised, as there is no point in waiting for further stock appreciation.Now let's reel it back to the new Q3 entry, the accelerated SARs due to market conditions. There are two types of SARs: market-vesting SARs which are solely based on the stock price and time-vesting SARs, which become available over a service period of up to nine years in Palantir's case. Even though Palantir is trading beyond $70, not all SARs are eligible to be exercised, only the market-vesting ones. In this case, as Palantir has filed, the outstanding expense associated with these being exercised is $119.70 million, or $120 million rounded. This will directly impact net income, something that Wall Street analysts are not taking into account for their Q4 EPS estimates.Wall Street analysts are not taking SARs into account for their estimatesLooking at Seeking Alpha's consolidated estimates for the fourth quarter, not a single analyst has revised down their EPS estimates. Rather, 12 analysts have revised their estimates to the upside.At the time of writing, the consensus estimate is $0.5 of earnings per share per GAAP. Meanwhile, the revenue estimates are $776.78 million. I won't bring my own assumptions into this exercise in order for us to get a clear grasp on what Wall Street analysts are implying. I assume 1.5% of share dilution quarter over quarter (Q/Q) in order to stay consistent with the dilution of the past quarter in 2024. That leaves us with ~$130 million of net income attributable to common stockholders, thus creating an EPS of $0.5 per share as per the estimates. In a chart, it looks like this:Palantir net income and marginsEmir Mulahalilovic, Palantir filings, Seeking AlphaWith the $120 million SARs impact on net income, Palantir would only record $10 million of net income attributable to common stockholders using the Wall Street estimates. That would look like this:Palantir net income with SARs impactEmir Mulahalilovic, Palantir filings, Seeking AlphaThat leaves us with an EPS of $0.004 per share, implying an EPS miss of 92%.There is also the possibility that all Wall Street analysts are aware of the SARs and have accounted for that. That would imply that Palantir will record $250 million of net income for the fourth quarter before applying SARs expenses, which would catapult the margins from ~20% in the past two quarters to 32%:Palantir net income assuming SARs accountabilityEmir Mulahalilovic, Palantir filings, Seeking AlphaExpensive does not mean overvaluedFor those familiar with my articles on Seeking Alpha, you will find me not paying any attention to stock charts or any pricing metrics. I am an investor who only looks at intrinsic value for a business, and as such, pricing metrics do not properly capture the dynamics of growth, cash flows, and risk, which are essential to deriving intrinsic value. However, I'll make a rare exception to that today because it ties into the topic of the article.Palantir historical P/E and P/SEmir MulahalilovicMost investors will note that Palantir is trading at expensive pricing, citing price-to-earnings (P/E) ratios or price-to-sales (P/S) ratios being far above peers at 75 P/S and 406 P/E. It is completely reasonable to adopt an investment approach where one is wary of expensive pricing, but it is not my approach. I value businesses, and for a company like Palantir that is at chapter 5 of a 35-chapter book, there are still a lot of ways the story can diverge. I deem most of Palantir's intrinsic value as terminal, meaning beyond even my projection periods, and that will never be captured using pricing metrics.I commonly see large media and investors refer to P/E or P/S when talking about a stock trading over or undervalued. This is not correct in my opinion, as P/E and P/S are references to the price of a stock and not the value of the business. A valuation to me is an assessment and projection of future business performance discounted back to present value by looking at growth, cash flows, and the associated risk. The output of such an assessment is intrinsic value and dates back centuries. Professor Aswath Damodaran of NYU Stern often illustrates the timeless nature of intrinsic valuation by referencing a Venetian glassmaker from the 1500s. He notes that even back then, the decision to buy a business was based on fundamental principles akin to modern intrinsic valuation—assessing cash flows, growth prospects, and inherent risks. The core of valuation has always been about understanding cash in, cash out, and how these are affected by growth and risk.A stock can trade expensively and be undervalued; similarly, it can trade cheaply and be overvalued. The two terms, pricing and valuation, are not synonymous. To illustrate my point, I have overlaid my own intrinsic valuation for Palantir as per my quarterly articles on Seeking Alpha against the stock price, and next to it, you can see the pricing metrics. There were periods when Palantir was considered undervalued by me while the P/E and P/S ratios were undoubtedly expensive.Palantir P/S and P/E vs stock price and valuationEmir MulahalilovicI don't mean to say that one approach to investing is superior to the other; I only mean that they are different. My investment approach allowed me to lay bare my thesis and story for Palantir along with my intrinsic valuation models, netting almost a 400% increase since my first article. That wouldn't have been possible if I had been scared away by the high P/E and P/S ratios throughout the year.Valuation and what the stock impliesI don't need to write many words to convince you that a P/S ratio of 75 and a P/E of 406 are expensive. For those who are interested, the current price-to-free cash flow ratio is 229. However, we are also at a point in time where I consider Palantir to be overvalued.A valuation is a reflection of the story you tell for a company. To be able to tell the story, you need to understand the business; you should be able to explain where each number in a valuation model comes from. Since we make assumptions for future performance, one's understanding of the business is correlated to the accuracy of the valuation. We will never be precise; all we can strive to do is to be as accurate as possible given the information available to us.My story for Palantir is told in previous articles in a lot of detail, but I will provide a summary. I adopt a sum-of-the-parts approach to valuing Palantir, as it has two distinct business segments: commercial and government. These segments are distinctly different in their growth drivers.For the government business, I tie my projections to the Department of Defense budget forecast. Historically, I have calculated Palantir to roughly bring in 75% of its government revenue in the U.S. from the Department of Defense (DoD). I then look at how much of the DoD budget goes towards AI, which is a bit difficult because it is not always clear what constitutes AI spending and what doesn't. CEO Alex Karp of Palantir has been quoted stating that 0.5% of the DoD budget goes toward AI, and he has also been quoted to stating that 0.2% of the budget goes toward AI. My findings align more with the 0.5% figure, which is the assumption I use. I then see an increasing amount of DoD spending going towards AI over the coming periods, going from 0.5% in 2023 to 5.5% in 2034, a 0.5% incremental increase per period.The reason I normalize the increase is because government spending tends to be very lumpy, both in the U.S. and globally. I have compiled all the contract awards to Palantir dating back to 2009, illustrating the lumpiness.Palantir government contract based awardsEmir Mulahalilovic, USAspending.govCumulatively over the same period, dating back to 2009, here is what the distribution looks like across different agencies:Palantir government agency distribution for awardsEmir Mulahalilovic, USAspending.govCumulatively, the DoD makes up 52% of all contract-based awards. This does not account for all the different types of awards, including the kind pertaining to indefinite delivery and indefinite quantity (IDIQ), which skews the statistics as it's very common within the DoD. For the most recent periods, the DoD makes up roughly 70-80% of the contract awards.For the commercial segment, it's a more simple approach where the growth is tied to the projected AI software market, where I see Palantir taking an increasingly larger share over the periods.Palantir is very capital-light and does not require much reinvestment in order to grow. As I have covered in my previous articles, the customer acquisition costs associated with increased revenue growth with more or less static expenses will drive fantastic margins. With the way their customers scale, with a very efficient go-to-market strategy using boot camps, and with strong network effects, I see Palantir reaching ~48% free cash flow to the firm margins by 2034.Palantir DCF modelEmir Mulahalilovic, Palantir filingsThese assumptions leave me with a 31.6% compounded annual growth rate (CAGR) through 2034 and a fair intrinsic value of ~$55 per share. That implies a -32% downside to fair intrinsic value from the current stock quote, or, in simple terms, it's very overvalued using my story for the company.So, what is the stock price actually implying? It is possible to do a reverse discounted cash flow model (DCF) in order to gauge what the market is implying that Palantir will perform. A typical DCF starts with the assumptions and derives an output; a reverse DCF starts with the output and works backward to find the inputs necessary to reach the output. It is not a source of truth but gives us a rough estimate of what Palantir needs to do in order to be fairly valued at the current quote of $80.When doing a reverse DCF, I find it important to leave as many subjective assumptions out of the model as possible. Because of this, I compose my discount rate by using market-implied variables: the risk-free rate and the implied equity risk premium for the month of December, calculated by Aswath Damodaran. Then it is prudent to include company-specific risk, so I have kept the 1.8% from my own valuation model. I also use the risk-free rate as a proxy for the terminal growth rate, as the risk-free rate contains economic implications. I'll also assume 35% free cash flow to the firm margins for each period.Palantir reverse DCFEmir MulahalilovicIn order for Palantir to justify an $80 per share price per intrinsic valuation, Palantir would have to grow at a 42% CAGR through 2033. That means that Palantir would need to do $74 billion (from a base of $2.2 billion in 2023) of revenue in 2033 as well as $26 billion of free cash flow. As a reference, $74 billion in revenue is 503% higher than the current Wall Street consensus as per Seeking Alpha's consolidated estimates.I can't tell a credible story where Palantir compounds at 42% per period for the next 9.25 periods with the information that is currently available about the business.However, sticking to my own story and only using market implications for the discount rate composition, Palantir is actually slightly undervalued. This approach is not as crazy as one might think, even though it is not my approach, as I find it important to introduce company-specific risk.Palantir DCF ModelEmir MulahalilovicThe risk-free rate is a key component, as that is the current yield available to us, risk-free. The implied equity risk premium is what investors charge in order to take on the risk of investing in equities. If I offered you an investment in the risk-free rate at 4.5%, which is the current yield, or equity with an expected return of 4.5% but with inherent risk, you would always choose the risk-free alternative. The implied equity risk premium is a calculation to solve for how much investors are charging in addition to the risk-free rate in order to take on the risk of equities. Aswath Damodaran calculates this monthly on his blog, where he uses the current market price of an equity index, the expected cash flows, and expected growth rates to find what the implied equity risk premium is at a given time.SummaryPalantir has been trading at a premium both in terms of pricing as well as valuation for an extended period of time. Throughout the year, Palantir has been expensive, but I have simultaneously found it undervalued at times and written articles with buy ratings. Trading at a premium also means that the company and stock are under heavy scrutiny. Palantir has been executing and performing; there have not been many negative narratives to latch on to for bears. However, there is one major headline coming for the Q4 results that not many are aware of.The market-vested SARs that fully appreciated once Palantir's stock traded above $70 have likely been executed as there is no merit to wait any further, meaning that Palantir will incur a $120 million stock-based compensation expense in Q4, hitting the net income and EPS. The outstanding SAR expenses and the vesting conditions are publicly available in Palantir's 10Q filing for Q3, yet no Wall Street analyst has accounted for it in their GAAP estimates. This means that assuming Wall Street would be accurate in their original estimates, Palantir will miss EPS by ~90%. Headlining such a miss for Q4 may be what sends Palantir on a long-awaited correction.As an investor who focuses strictly on intrinsic valuation and not pricing, such an event is not enough for me to sell a high-quality business such as Palantir. I strive to only sell companies of such pristine caliber only if my business thesis starts to deteriorate, which is not the case for Palantir. Depending on one's approach to intrinsic valuation, one could argue that Palantir is actually fairly valued without adjusting my projections. With this in mind, I will keep my hold rating for Palantir despite the upcoming negative catalyst to the stock and despite Palantir trading overvalued; it is just too strong of a business for me to sell without anything tangible that may disrupt this juggernaut of a business.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":385865735782464,"gmtCreate":1735216656318,"gmtModify":1735216660228,"author":{"id":"3574166160473753","authorId":"3574166160473753","name":"Ahvi","avatar":"https://static.tigerbbs.com/bd216b3fbf19641a7fe648254585ce79","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3574166160473753","authorIdStr":"3574166160473753"},"htmlText":"Excellent analysis that doesn't just blindly quote PE ratios","listText":"Excellent analysis that doesn't just blindly quote PE ratios","text":"Excellent analysis that doesn't just blindly quote PE ratios","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/385865735782464","repostId":1192055926,"repostType":2,"repost":{"id":"1192055926","kind":"news","pubTimestamp":1735214373,"share":"https://ttm.financial/m/news/1192055926?lang=&edition=fundamental","pubTime":"2024-12-26 19:59","market":"us","language":"en","title":"Palantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss","url":"https://stock-news.laohu8.com/highlight/detail?id=1192055926","media":"Seeking Alpha","summary":"SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and invest","content":"<html><head></head><body><h2 id=\"id_2625158676\">Summary</h2><ul style=\"\"><li><p>An upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.</p></li><li><p>The stock being expensive does not mean that it is overvalued, and investors too fixated on P/S ratios would have missed the remarkable Palantir gains.</p></li><li><p>My current fair intrinsic value for the business is $55 per share, implying a -32% downside. However, it is undervalued using market implied discount rates.</p></li><li><p>I maintain a hold rating for Palantir, as the business remains robust despite the anticipated negative Q4 catalyst and current overvaluation.</p></li></ul><p>Since I first initiated a buy rating for <a href=\"https://laohu8.com/S/PLTR\">Palantir Technologies</a>, the stock has returned 371% against ~20% of the S&amp;P 500. Typically, my investment approach ignores pricing altogether and does not focus on looking at charts or pricing metrics such as price-to-earnings or price-to-sales. It also ignores estimates by other analysts. I research businesses, value them, and base my decisions on derived fair intrinsic value.</p><p>However, while Palantir is one of the most robust businesses that I have ever studied, the abnormal outperformance has made me make an exception to my typical investment philosophy. There is a disclosure in the 10Q SEC filing for the third quarter that will see Palantir take a big hit to its EPS, something Wall Street analysts have not accounted for when I review their estimates. This will mean that Palantir will miss EPS by ~90%, assuming Palantir only meets Wall Street consensus estimates.</p><p>I have already reviewed Palantir&#39;s Q3 earnings in a separate article, and at the time, the conditions were not met in order for the disclosure to be meaningful; therefore, I saw no need to mention it. However, the stock has surged since then, and is now meeting the criteria.</p><p>This article will not focus on details surrounding the business. For that, I would refer you to my previous Palantir articles. This article will discuss the current Palantir stock quote pertaining to the company&#39;s pricing and valuation.</p><h2 id=\"id_2220283489\">Stock Appreciation Rights (SARs)</h2><p>Many investors are familiar with stock-based compensation (SBC), a common means to compensate employees and attract talent. However, not many are familiar with all the intricacies of the different types of stock-based compensation. Palantir offers several types of SBC to their employees, but there is one specific type in particular that surfaced in 2024, SARs.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/336e248deebe429c83043881ad322df9\" alt=\"Palantir stock-based compensation\" title=\"Palantir stock-based compensation\" tg-width=\"640\" tg-height=\"313\"/><span>Palantir stock-based compensation</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir Technology filings</p><p>The chart shows Palantir&#39;s reported total unrecognized stock-based compensation expense by type. As of Q3, there is a new entry: Accelerated SARs due to market conditions. This is the entry that I want us to focus on, and it is found on page 17 of Palantir&#39;s 10Q filing for the third quarter of 2024, it reads:</p><blockquote><p>Of the total SARs outstanding, $119.7 million of unrecognized expense would be accelerated if the market condition related to Market-Vesting SARs is achieved earlier than its derived service period.</p></blockquote><p>First, what are stock appreciation rights?</p><p>It&#39;s a type of employee compensation that is based on the increase in the company&#39;s stock price over a set period and is unlocked within a set stock price range.</p><p>Investors may confuse this with performance-based restricted stock units (RSUs), but there&#39;s a difference. SARs reward employees only if the stock price itself rises, while performance RSUs reward employees if the company meets specific performance objectives, regardless of how much the stock price has appreciated.</p><p>The weighted average fair value for the SARs that have been issued is $50 per share, with a maximum appreciation of $20. In short, the window for the SARs to unlock is above $50, but the fully appreciated amount is $70, meaning beyond $70, there is no reason not to exercise them. At the time of writing my last article, Palantir was trading at $55; it&#39;s now at $80, meaning all eligible SARs should already have been exercised, as there is no point in waiting for further stock appreciation.</p><p>Now let&#39;s reel it back to the new Q3 entry, the accelerated SARs due to market conditions. There are two types of SARs: market-vesting SARs which are solely based on the stock price and time-vesting SARs, which become available over a service period of up to nine years in Palantir&#39;s case. Even though Palantir is trading beyond $70, not all SARs are eligible to be exercised, only the market-vesting ones. In this case, as Palantir has filed, the outstanding expense associated with these being exercised is $119.70 million, or $120 million rounded. This will directly impact net income, something that Wall Street analysts are not taking into account for their Q4 EPS estimates.</p><h2 id=\"id_3994758123\">Wall Street analysts are not taking SARs into account for their estimates</h2><p>Looking at Seeking Alpha&#39;s consolidated estimates for the fourth quarter, not a single analyst has revised down their EPS estimates. Rather, 12 analysts have revised their estimates to the upside.</p><p>At the time of writing, the consensus estimate is $0.5 of earnings per share per GAAP. Meanwhile, the revenue estimates are $776.78 million. I won&#39;t bring my own assumptions into this exercise in order for us to get a clear grasp on what Wall Street analysts are implying. I assume 1.5% of share dilution quarter over quarter (Q/Q) in order to stay consistent with the dilution of the past quarter in 2024. That leaves us with ~$130 million of net income attributable to common stockholders, thus creating an EPS of $0.5 per share as per the estimates. In a chart, it looks like this:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/2c8fb7a101ad3fac2e874ac14eb75765\" alt=\"Palantir net income and margins\" title=\"Palantir net income and margins\" tg-width=\"640\" tg-height=\"316\"/><span>Palantir net income and margins</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings, Seeking Alpha</p><p>With the $120 million SARs impact on net income, Palantir would only record $10 million of net income attributable to common stockholders using the Wall Street estimates. That would look like this:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/baa80a14d4949b10ddebb527c1f87a42\" alt=\"Palantir net income with SARs impact\" title=\"Palantir net income with SARs impact\" tg-width=\"640\" tg-height=\"314\"/><span>Palantir net income with SARs impact</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings, Seeking Alpha</p><p>That leaves us with an EPS of $0.004 per share, implying an EPS miss of 92%.</p><p>There is also the possibility that all Wall Street analysts are aware of the SARs and have accounted for that. That would imply that Palantir will record $250 million of net income for the fourth quarter before applying SARs expenses, which would catapult the margins from ~20% in the past two quarters to 32%:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/b9262bd35a5759639cb30d80421b9333\" alt=\"Palantir net income assuming SARs accountability\" title=\"Palantir net income assuming SARs accountability\" tg-width=\"640\" tg-height=\"315\"/><span>Palantir net income assuming SARs accountability</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings, Seeking Alpha</p><h2 id=\"id_3521161590\">Expensive does not mean overvalued</h2><p>For those familiar with my articles on Seeking Alpha, you will find me not paying any attention to stock charts or any pricing metrics. I am an investor who only looks at intrinsic value for a business, and as such, pricing metrics do not properly capture the dynamics of growth, cash flows, and risk, which are essential to deriving intrinsic value. However, I&#39;ll make a rare exception to that today because it ties into the topic of the article.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/abf609eb57d279bd4eeb72ec4905ae62\" alt=\"Palantir historical P/E and P/S\" title=\"Palantir historical P/E and P/S\" tg-width=\"640\" tg-height=\"309\"/><span>Palantir historical P/E and P/S</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>Most investors will note that Palantir is trading at expensive pricing, citing price-to-earnings (P/E) ratios or price-to-sales (P/S) ratios being far above peers at 75 P/S and 406 P/E. It is completely reasonable to adopt an investment approach where one is wary of expensive pricing, but it is not my approach. I value businesses, and for a company like Palantir that is at chapter 5 of a 35-chapter book, there are still a lot of ways the story can diverge. I deem most of Palantir&#39;s intrinsic value as terminal, meaning beyond even my projection periods, and that will never be captured using pricing metrics.</p><p>I commonly see large media and investors refer to P/E or P/S when talking about a stock trading over or undervalued. This is not correct in my opinion, as P/E and P/S are references to the price of a stock and not the value of the business. A valuation to me is an assessment and projection of future business performance discounted back to present value by looking at growth, cash flows, and the associated risk. The output of such an assessment is intrinsic value and dates back centuries. Professor Aswath Damodaran of NYU Stern often illustrates the timeless nature of intrinsic valuation by referencing a Venetian glassmaker from the 1500s. He notes that even back then, the decision to buy a business was based on fundamental principles akin to modern intrinsic valuation—assessing cash flows, growth prospects, and inherent risks. The core of valuation has always been about understanding cash in, cash out, and how these are affected by growth and risk.</p><p>A stock can trade expensively and be undervalued; similarly, it can trade cheaply and be overvalued. The two terms, pricing and valuation, are not synonymous. To illustrate my point, I have overlaid my own intrinsic valuation for Palantir as per my quarterly articles on Seeking Alpha against the stock price, and next to it, you can see the pricing metrics. There were periods when Palantir was considered undervalued by me while the P/E and P/S ratios were undoubtedly expensive.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/abb91f34bc65dc43051f0bddf9269809\" alt=\"Palantir P/S and P/E vs stock price and valuation\" title=\"Palantir P/S and P/E vs stock price and valuation\" tg-width=\"640\" tg-height=\"353\"/><span>Palantir P/S and P/E vs stock price and valuation</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>I don&#39;t mean to say that one approach to investing is superior to the other; I only mean that they are different. My investment approach allowed me to lay bare my thesis and story for Palantir along with my intrinsic valuation models, netting almost a 400% increase since my first article. That wouldn&#39;t have been possible if I had been scared away by the high P/E and P/S ratios throughout the year.</p><h2 id=\"id_1973629588\">Valuation and what the stock implies</h2><p>I don&#39;t need to write many words to convince you that a P/S ratio of 75 and a P/E of 406 are expensive. For those who are interested, the current price-to-free cash flow ratio is 229. However, we are also at a point in time where I consider Palantir to be overvalued.</p><p>A valuation is a reflection of the story you tell for a company. To be able to tell the story, you need to understand the business; you should be able to explain where each number in a valuation model comes from. Since we make assumptions for future performance, one&#39;s understanding of the business is correlated to the accuracy of the valuation. We will never be precise; all we can strive to do is to be as accurate as possible given the information available to us.</p><p>My story for Palantir is told in previous articles in a lot of detail, but I will provide a summary. I adopt a sum-of-the-parts approach to valuing Palantir, as it has two distinct business segments: commercial and government. These segments are distinctly different in their growth drivers.</p><p>For the government business, I tie my projections to the Department of Defense budget forecast. Historically, I have calculated Palantir to roughly bring in 75% of its government revenue in the U.S. from the Department of Defense (DoD). I then look at how much of the DoD budget goes towards AI, which is a bit difficult because it is not always clear what constitutes AI spending and what doesn&#39;t. CEO Alex Karp of Palantir has been quoted stating that 0.5% of the DoD budget goes toward AI, and he has also been quoted to stating that 0.2% of the budget goes toward AI. My findings align more with the 0.5% figure, which is the assumption I use. I then see an increasing amount of DoD spending going towards AI over the coming periods, going from 0.5% in 2023 to 5.5% in 2034, a 0.5% incremental increase per period.</p><p>The reason I normalize the increase is because government spending tends to be very lumpy, both in the U.S. and globally. I have compiled all the contract awards to Palantir dating back to 2009, illustrating the lumpiness.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/4c14e856be912a3fc92863dffcdad79b\" alt=\"Palantir government contract based awards\" title=\"Palantir government contract based awards\" tg-width=\"640\" tg-height=\"318\"/><span>Palantir government contract based awards</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, USAspending.gov</p><p>Cumulatively over the same period, dating back to 2009, here is what the distribution looks like across different agencies:</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/07dcb6a2d87327db4814361599a23812\" alt=\"Palantir government agency distribution for awards\" title=\"Palantir government agency distribution for awards\" tg-width=\"640\" tg-height=\"313\"/><span>Palantir government agency distribution for awards</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, USAspending.gov</p><p>Cumulatively, the DoD makes up 52% of all contract-based awards. This does not account for all the different types of awards, including the kind pertaining to indefinite delivery and indefinite quantity (IDIQ), which skews the statistics as it&#39;s very common within the DoD. For the most recent periods, the DoD makes up roughly 70-80% of the contract awards.</p><p>For the commercial segment, it&#39;s a more simple approach where the growth is tied to the projected AI software market, where I see Palantir taking an increasingly larger share over the periods.</p><p>Palantir is very capital-light and does not require much reinvestment in order to grow. As I have covered in my previous articles, the customer acquisition costs associated with increased revenue growth with more or less static expenses will drive fantastic margins. With the way their customers scale, with a very efficient go-to-market strategy using boot camps, and with strong network effects, I see Palantir reaching ~48% free cash flow to the firm margins by 2034.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/1358cd74d64e9aa315adcd2a600a1486\" alt=\"Palantir DCF model\" title=\"Palantir DCF model\" tg-width=\"640\" tg-height=\"328\"/><span>Palantir DCF model</span></p><p style=\"text-align: left;\">Emir Mulahalilovic, Palantir filings</p><p>These assumptions leave me with a 31.6% compounded annual growth rate (CAGR) through 2034 and a fair intrinsic value of ~$55 per share. That implies a -32% downside to fair intrinsic value from the current stock quote, or, in simple terms, it&#39;s very overvalued using my story for the company.</p><p>So, what is the stock price actually implying? It is possible to do a reverse discounted cash flow model (DCF) in order to gauge what the market is implying that Palantir will perform. A typical DCF starts with the assumptions and derives an output; a reverse DCF starts with the output and works backward to find the inputs necessary to reach the output. It is not a source of truth but gives us a rough estimate of what Palantir needs to do in order to be fairly valued at the current quote of $80.</p><p>When doing a reverse DCF, I find it important to leave as many subjective assumptions out of the model as possible. Because of this, I compose my discount rate by using market-implied variables: the risk-free rate and the implied equity risk premium for the month of December, calculated by Aswath Damodaran. Then it is prudent to include company-specific risk, so I have kept the 1.8% from my own valuation model. I also use the risk-free rate as a proxy for the terminal growth rate, as the risk-free rate contains economic implications. I&#39;ll also assume 35% free cash flow to the firm margins for each period.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/8cad10c02f681bf5248d2f6a1a9f7fe3\" alt=\"Palantir reverse DCF\" title=\"Palantir reverse DCF\" tg-width=\"640\" tg-height=\"279\"/><span>Palantir reverse DCF</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>In order for Palantir to justify an $80 per share price per intrinsic valuation, Palantir would have to grow at a 42% CAGR through 2033. That means that Palantir would need to do $74 billion (from a base of $2.2 billion in 2023) of revenue in 2033 as well as $26 billion of free cash flow. As a reference, $74 billion in revenue is 503% higher than the current Wall Street consensus as per Seeking Alpha&#39;s consolidated estimates.</p><p>I can&#39;t tell a credible story where Palantir compounds at 42% per period for the next 9.25 periods with the information that is currently available about the business.</p><p>However, sticking to my own story and only using market implications for the discount rate composition, Palantir is actually slightly undervalued. This approach is not as crazy as one might think, even though it is not my approach, as I find it important to introduce company-specific risk.</p><p class=\"t-img-caption\"><img src=\"https://community-static.tradeup.com/news/999e5a332efbdc670584be65694f25bc\" alt=\"Palantir DCF Model\" title=\"Palantir DCF Model\" tg-width=\"640\" tg-height=\"329\"/><span>Palantir DCF Model</span></p><p style=\"text-align: left;\">Emir Mulahalilovic</p><p>The risk-free rate is a key component, as that is the current yield available to us, risk-free. The implied equity risk premium is what investors charge in order to take on the risk of investing in equities. If I offered you an investment in the risk-free rate at 4.5%, which is the current yield, or equity with an expected return of 4.5% but with inherent risk, you would always choose the risk-free alternative. The implied equity risk premium is a calculation to solve for how much investors are charging in addition to the risk-free rate in order to take on the risk of equities. Aswath Damodaran calculates this monthly on his blog, where he uses the current market price of an equity index, the expected cash flows, and expected growth rates to find what the implied equity risk premium is at a given time.</p><h2 id=\"id_2660013685\">Summary</h2><p>Palantir has been trading at a premium both in terms of pricing as well as valuation for an extended period of time. Throughout the year, Palantir has been expensive, but I have simultaneously found it undervalued at times and written articles with buy ratings. Trading at a premium also means that the company and stock are under heavy scrutiny. Palantir has been executing and performing; there have not been many negative narratives to latch on to for bears. However, there is one major headline coming for the Q4 results that not many are aware of.</p><p>The market-vested SARs that fully appreciated once Palantir&#39;s stock traded above $70 have likely been executed as there is no merit to wait any further, meaning that Palantir will incur a $120 million stock-based compensation expense in Q4, hitting the net income and EPS. The outstanding SAR expenses and the vesting conditions are publicly available in Palantir&#39;s 10Q filing for Q3, yet no Wall Street analyst has accounted for it in their GAAP estimates. This means that assuming Wall Street would be accurate in their original estimates, Palantir will miss EPS by ~90%. Headlining such a miss for Q4 may be what sends Palantir on a long-awaited correction.</p><p>As an investor who focuses strictly on intrinsic valuation and not pricing, such an event is not enough for me to sell a high-quality business such as Palantir. I strive to only sell companies of such pristine caliber only if my business thesis starts to deteriorate, which is not the case for Palantir. Depending on one&#39;s approach to intrinsic valuation, one could argue that Palantir is actually fairly valued without adjusting my projections. With this in mind, I will keep my hold rating for Palantir despite the upcoming negative catalyst to the stock and despite Palantir trading overvalued; it is just too strong of a business for me to sell without anything tangible that may disrupt this juggernaut of a business.</p></body></html>","source":"lsy1728464409321","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Palantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPalantir: An Upcoming SARs Expense Could Cause A Significant EPS Miss\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-12-26 19:59 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4746468-palantir-upcoming-sars-expense-could-cause-significant-eps-miss><strong>Seeking Alpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and ...</p>\n\n<a href=\"https://seekingalpha.com/article/4746468-palantir-upcoming-sars-expense-could-cause-significant-eps-miss\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"PLTR":"Palantir Technologies Inc."},"source_url":"https://seekingalpha.com/article/4746468-palantir-upcoming-sars-expense-could-cause-significant-eps-miss","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1192055926","content_text":"SummaryAn upcoming $120 million SARs expense will likely cause a significant EPS miss, unaccounted for by Wall Street analysts.The stock being expensive does not mean that it is overvalued, and investors too fixated on P/S ratios would have missed the remarkable Palantir gains.My current fair intrinsic value for the business is $55 per share, implying a -32% downside. However, it is undervalued using market implied discount rates.I maintain a hold rating for Palantir, as the business remains robust despite the anticipated negative Q4 catalyst and current overvaluation.Since I first initiated a buy rating for Palantir Technologies, the stock has returned 371% against ~20% of the S&P 500. Typically, my investment approach ignores pricing altogether and does not focus on looking at charts or pricing metrics such as price-to-earnings or price-to-sales. It also ignores estimates by other analysts. I research businesses, value them, and base my decisions on derived fair intrinsic value.However, while Palantir is one of the most robust businesses that I have ever studied, the abnormal outperformance has made me make an exception to my typical investment philosophy. There is a disclosure in the 10Q SEC filing for the third quarter that will see Palantir take a big hit to its EPS, something Wall Street analysts have not accounted for when I review their estimates. This will mean that Palantir will miss EPS by ~90%, assuming Palantir only meets Wall Street consensus estimates.I have already reviewed Palantir's Q3 earnings in a separate article, and at the time, the conditions were not met in order for the disclosure to be meaningful; therefore, I saw no need to mention it. However, the stock has surged since then, and is now meeting the criteria.This article will not focus on details surrounding the business. For that, I would refer you to my previous Palantir articles. This article will discuss the current Palantir stock quote pertaining to the company's pricing and valuation.Stock Appreciation Rights (SARs)Many investors are familiar with stock-based compensation (SBC), a common means to compensate employees and attract talent. However, not many are familiar with all the intricacies of the different types of stock-based compensation. Palantir offers several types of SBC to their employees, but there is one specific type in particular that surfaced in 2024, SARs.Palantir stock-based compensationEmir Mulahalilovic, Palantir Technology filingsThe chart shows Palantir's reported total unrecognized stock-based compensation expense by type. As of Q3, there is a new entry: Accelerated SARs due to market conditions. This is the entry that I want us to focus on, and it is found on page 17 of Palantir's 10Q filing for the third quarter of 2024, it reads:Of the total SARs outstanding, $119.7 million of unrecognized expense would be accelerated if the market condition related to Market-Vesting SARs is achieved earlier than its derived service period.First, what are stock appreciation rights?It's a type of employee compensation that is based on the increase in the company's stock price over a set period and is unlocked within a set stock price range.Investors may confuse this with performance-based restricted stock units (RSUs), but there's a difference. SARs reward employees only if the stock price itself rises, while performance RSUs reward employees if the company meets specific performance objectives, regardless of how much the stock price has appreciated.The weighted average fair value for the SARs that have been issued is $50 per share, with a maximum appreciation of $20. In short, the window for the SARs to unlock is above $50, but the fully appreciated amount is $70, meaning beyond $70, there is no reason not to exercise them. At the time of writing my last article, Palantir was trading at $55; it's now at $80, meaning all eligible SARs should already have been exercised, as there is no point in waiting for further stock appreciation.Now let's reel it back to the new Q3 entry, the accelerated SARs due to market conditions. There are two types of SARs: market-vesting SARs which are solely based on the stock price and time-vesting SARs, which become available over a service period of up to nine years in Palantir's case. Even though Palantir is trading beyond $70, not all SARs are eligible to be exercised, only the market-vesting ones. In this case, as Palantir has filed, the outstanding expense associated with these being exercised is $119.70 million, or $120 million rounded. This will directly impact net income, something that Wall Street analysts are not taking into account for their Q4 EPS estimates.Wall Street analysts are not taking SARs into account for their estimatesLooking at Seeking Alpha's consolidated estimates for the fourth quarter, not a single analyst has revised down their EPS estimates. Rather, 12 analysts have revised their estimates to the upside.At the time of writing, the consensus estimate is $0.5 of earnings per share per GAAP. Meanwhile, the revenue estimates are $776.78 million. I won't bring my own assumptions into this exercise in order for us to get a clear grasp on what Wall Street analysts are implying. I assume 1.5% of share dilution quarter over quarter (Q/Q) in order to stay consistent with the dilution of the past quarter in 2024. That leaves us with ~$130 million of net income attributable to common stockholders, thus creating an EPS of $0.5 per share as per the estimates. In a chart, it looks like this:Palantir net income and marginsEmir Mulahalilovic, Palantir filings, Seeking AlphaWith the $120 million SARs impact on net income, Palantir would only record $10 million of net income attributable to common stockholders using the Wall Street estimates. That would look like this:Palantir net income with SARs impactEmir Mulahalilovic, Palantir filings, Seeking AlphaThat leaves us with an EPS of $0.004 per share, implying an EPS miss of 92%.There is also the possibility that all Wall Street analysts are aware of the SARs and have accounted for that. That would imply that Palantir will record $250 million of net income for the fourth quarter before applying SARs expenses, which would catapult the margins from ~20% in the past two quarters to 32%:Palantir net income assuming SARs accountabilityEmir Mulahalilovic, Palantir filings, Seeking AlphaExpensive does not mean overvaluedFor those familiar with my articles on Seeking Alpha, you will find me not paying any attention to stock charts or any pricing metrics. I am an investor who only looks at intrinsic value for a business, and as such, pricing metrics do not properly capture the dynamics of growth, cash flows, and risk, which are essential to deriving intrinsic value. However, I'll make a rare exception to that today because it ties into the topic of the article.Palantir historical P/E and P/SEmir MulahalilovicMost investors will note that Palantir is trading at expensive pricing, citing price-to-earnings (P/E) ratios or price-to-sales (P/S) ratios being far above peers at 75 P/S and 406 P/E. It is completely reasonable to adopt an investment approach where one is wary of expensive pricing, but it is not my approach. I value businesses, and for a company like Palantir that is at chapter 5 of a 35-chapter book, there are still a lot of ways the story can diverge. I deem most of Palantir's intrinsic value as terminal, meaning beyond even my projection periods, and that will never be captured using pricing metrics.I commonly see large media and investors refer to P/E or P/S when talking about a stock trading over or undervalued. This is not correct in my opinion, as P/E and P/S are references to the price of a stock and not the value of the business. A valuation to me is an assessment and projection of future business performance discounted back to present value by looking at growth, cash flows, and the associated risk. The output of such an assessment is intrinsic value and dates back centuries. Professor Aswath Damodaran of NYU Stern often illustrates the timeless nature of intrinsic valuation by referencing a Venetian glassmaker from the 1500s. He notes that even back then, the decision to buy a business was based on fundamental principles akin to modern intrinsic valuation—assessing cash flows, growth prospects, and inherent risks. The core of valuation has always been about understanding cash in, cash out, and how these are affected by growth and risk.A stock can trade expensively and be undervalued; similarly, it can trade cheaply and be overvalued. The two terms, pricing and valuation, are not synonymous. To illustrate my point, I have overlaid my own intrinsic valuation for Palantir as per my quarterly articles on Seeking Alpha against the stock price, and next to it, you can see the pricing metrics. There were periods when Palantir was considered undervalued by me while the P/E and P/S ratios were undoubtedly expensive.Palantir P/S and P/E vs stock price and valuationEmir MulahalilovicI don't mean to say that one approach to investing is superior to the other; I only mean that they are different. My investment approach allowed me to lay bare my thesis and story for Palantir along with my intrinsic valuation models, netting almost a 400% increase since my first article. That wouldn't have been possible if I had been scared away by the high P/E and P/S ratios throughout the year.Valuation and what the stock impliesI don't need to write many words to convince you that a P/S ratio of 75 and a P/E of 406 are expensive. For those who are interested, the current price-to-free cash flow ratio is 229. However, we are also at a point in time where I consider Palantir to be overvalued.A valuation is a reflection of the story you tell for a company. To be able to tell the story, you need to understand the business; you should be able to explain where each number in a valuation model comes from. Since we make assumptions for future performance, one's understanding of the business is correlated to the accuracy of the valuation. We will never be precise; all we can strive to do is to be as accurate as possible given the information available to us.My story for Palantir is told in previous articles in a lot of detail, but I will provide a summary. I adopt a sum-of-the-parts approach to valuing Palantir, as it has two distinct business segments: commercial and government. These segments are distinctly different in their growth drivers.For the government business, I tie my projections to the Department of Defense budget forecast. Historically, I have calculated Palantir to roughly bring in 75% of its government revenue in the U.S. from the Department of Defense (DoD). I then look at how much of the DoD budget goes towards AI, which is a bit difficult because it is not always clear what constitutes AI spending and what doesn't. CEO Alex Karp of Palantir has been quoted stating that 0.5% of the DoD budget goes toward AI, and he has also been quoted to stating that 0.2% of the budget goes toward AI. My findings align more with the 0.5% figure, which is the assumption I use. I then see an increasing amount of DoD spending going towards AI over the coming periods, going from 0.5% in 2023 to 5.5% in 2034, a 0.5% incremental increase per period.The reason I normalize the increase is because government spending tends to be very lumpy, both in the U.S. and globally. I have compiled all the contract awards to Palantir dating back to 2009, illustrating the lumpiness.Palantir government contract based awardsEmir Mulahalilovic, USAspending.govCumulatively over the same period, dating back to 2009, here is what the distribution looks like across different agencies:Palantir government agency distribution for awardsEmir Mulahalilovic, USAspending.govCumulatively, the DoD makes up 52% of all contract-based awards. This does not account for all the different types of awards, including the kind pertaining to indefinite delivery and indefinite quantity (IDIQ), which skews the statistics as it's very common within the DoD. For the most recent periods, the DoD makes up roughly 70-80% of the contract awards.For the commercial segment, it's a more simple approach where the growth is tied to the projected AI software market, where I see Palantir taking an increasingly larger share over the periods.Palantir is very capital-light and does not require much reinvestment in order to grow. As I have covered in my previous articles, the customer acquisition costs associated with increased revenue growth with more or less static expenses will drive fantastic margins. With the way their customers scale, with a very efficient go-to-market strategy using boot camps, and with strong network effects, I see Palantir reaching ~48% free cash flow to the firm margins by 2034.Palantir DCF modelEmir Mulahalilovic, Palantir filingsThese assumptions leave me with a 31.6% compounded annual growth rate (CAGR) through 2034 and a fair intrinsic value of ~$55 per share. That implies a -32% downside to fair intrinsic value from the current stock quote, or, in simple terms, it's very overvalued using my story for the company.So, what is the stock price actually implying? It is possible to do a reverse discounted cash flow model (DCF) in order to gauge what the market is implying that Palantir will perform. A typical DCF starts with the assumptions and derives an output; a reverse DCF starts with the output and works backward to find the inputs necessary to reach the output. It is not a source of truth but gives us a rough estimate of what Palantir needs to do in order to be fairly valued at the current quote of $80.When doing a reverse DCF, I find it important to leave as many subjective assumptions out of the model as possible. Because of this, I compose my discount rate by using market-implied variables: the risk-free rate and the implied equity risk premium for the month of December, calculated by Aswath Damodaran. Then it is prudent to include company-specific risk, so I have kept the 1.8% from my own valuation model. I also use the risk-free rate as a proxy for the terminal growth rate, as the risk-free rate contains economic implications. I'll also assume 35% free cash flow to the firm margins for each period.Palantir reverse DCFEmir MulahalilovicIn order for Palantir to justify an $80 per share price per intrinsic valuation, Palantir would have to grow at a 42% CAGR through 2033. That means that Palantir would need to do $74 billion (from a base of $2.2 billion in 2023) of revenue in 2033 as well as $26 billion of free cash flow. As a reference, $74 billion in revenue is 503% higher than the current Wall Street consensus as per Seeking Alpha's consolidated estimates.I can't tell a credible story where Palantir compounds at 42% per period for the next 9.25 periods with the information that is currently available about the business.However, sticking to my own story and only using market implications for the discount rate composition, Palantir is actually slightly undervalued. This approach is not as crazy as one might think, even though it is not my approach, as I find it important to introduce company-specific risk.Palantir DCF ModelEmir MulahalilovicThe risk-free rate is a key component, as that is the current yield available to us, risk-free. The implied equity risk premium is what investors charge in order to take on the risk of investing in equities. If I offered you an investment in the risk-free rate at 4.5%, which is the current yield, or equity with an expected return of 4.5% but with inherent risk, you would always choose the risk-free alternative. The implied equity risk premium is a calculation to solve for how much investors are charging in addition to the risk-free rate in order to take on the risk of equities. Aswath Damodaran calculates this monthly on his blog, where he uses the current market price of an equity index, the expected cash flows, and expected growth rates to find what the implied equity risk premium is at a given time.SummaryPalantir has been trading at a premium both in terms of pricing as well as valuation for an extended period of time. Throughout the year, Palantir has been expensive, but I have simultaneously found it undervalued at times and written articles with buy ratings. Trading at a premium also means that the company and stock are under heavy scrutiny. Palantir has been executing and performing; there have not been many negative narratives to latch on to for bears. However, there is one major headline coming for the Q4 results that not many are aware of.The market-vested SARs that fully appreciated once Palantir's stock traded above $70 have likely been executed as there is no merit to wait any further, meaning that Palantir will incur a $120 million stock-based compensation expense in Q4, hitting the net income and EPS. The outstanding SAR expenses and the vesting conditions are publicly available in Palantir's 10Q filing for Q3, yet no Wall Street analyst has accounted for it in their GAAP estimates. This means that assuming Wall Street would be accurate in their original estimates, Palantir will miss EPS by ~90%. Headlining such a miss for Q4 may be what sends Palantir on a long-awaited correction.As an investor who focuses strictly on intrinsic valuation and not pricing, such an event is not enough for me to sell a high-quality business such as Palantir. I strive to only sell companies of such pristine caliber only if my business thesis starts to deteriorate, which is not the case for Palantir. Depending on one's approach to intrinsic valuation, one could argue that Palantir is actually fairly valued without adjusting my projections. With this in mind, I will keep my hold rating for Palantir despite the upcoming negative catalyst to the stock and despite Palantir trading overvalued; it is just too strong of a business for me to sell without anything tangible that may disrupt this juggernaut of a business.","news_type":1},"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"hasMoreComments":true,"newsSizeData":{"likeSize":12,"commentSize":2,"repostSize":3,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}