Reflections on Palantir

246 PE, with a $94B market cap.

https://finance.yahoo.com/quote/PLTR/

Alex Karp has something figured out. The investor class loves him.

As best I can tell only ARM has a higher PE and Market Cap.

https://www.marketbeat.com/market-data/high-pe-stocks/

Not every company trades on P/E. Some trade on EBITDA, others on Revenue. It's a spectrum. The more mature (code for more profitable, lower growth), the more likely it trades on P/E.

Palantir has $0.09 earnings per share. 2023 was the first year they were profitable. So P/E isn't the right metric to look at here.

Also no investor ever trades on _trailing_ metrics. It's all about forward earnings, but 99.999999% of valuation multiples you see online are trailing metrics (or use questionable forward estimates pulled from some aggregate which is also just noise instead of actually diligencing estimates)

Those are trailing P/E numbers, so they are just plain wrong and should be disregarded.

Also P/E doesn't matter for companies that have not been profitable for long. Any PE number above 100x is very likely just noise. I wouldn't look at anything too far above 30x, maybe 40x to account for the craze behind NVDA today

It's always amusing when armchair investors throw around financial metrics meant for entirely different types of companies, just to sound knowledgeable because they've heard others repeat the same lazy jargon.

Fine, but it is notable / extremely notable that there is only one large cap more expensive than Palantir on a PE basis. I'm not splitting hairs here, I'm talking about extreme outliers.

Honest question from someone who "armchair invests" in broad-market ETFs: what metrics would I look at for a company like Palantir? I'm not asking for investment lessons. Just your opinion and some links would be fine.

> they are just plain wrong and should be disregarded.

Are you saying Palantir's previous 10-Ks and 10-Qs have material misstatements of fact?

Kind of conveniently cut off the first part of the statement there. The basis of fundamental valuation, discounted cash flow analysis, looks at all cash flows, forever, into the far future until the company dies. For a sufficiently mature company, current earnings are reasonably considered a good approximation of future earnings. For a newer company that is growing rapidly and spending most of its cash on long term investments rather than current year operations, it is not. Otherwise, every new company that has no earnings yet would be worthless, or if you consider losing money to be negative earnings, you're saying they should be paying you to own them.

No, it's just the trading multiples derived from them that are totally wrong for the purposes of valuing the company today, because the Ks and Qs pertain to the past, which we cannot visit.

It isn't really notable because those PE multiples are literally just noise. There are many companies with negative PE on that list too, even though that makes no sense.

To take that even further, imagine ACME Corp.'s stock price is $1.00 today. You're a research analyst and built a very robust model based on your understanding of the company, the market in which it operates, corporate guidance, competitor performance, your experience, phone checks with the sales channel, etc. Your model currently says the company will have negative ($0.01) EPS over the next 12 months. Based on this information, its implied forward P/E multiple is -100.0x.

The next day, you come to work and update your model based on some new information like the Fed cutting rates by 25 bps or revised labor market assumptions, what have you, such that your expected next twelve months EPS is now positive $0.01. The implied trading multiple is now 100.0x.

Do you think a $0.02 change in the expected EPS should result in a 200.0x P/E difference? No, it shouldn't. The P/E ratio for a company with negative or near-zero earnings has no meaning.

Always forward multiples, never trailing ones. Palantir likely trades on Enterprise Value / NTM Revenue (next 12 months).

Don't just take the average provided by something like Yahoo Finance. You need to look at which analysts are providing estimates, decide which of those analysts are reliable (e.g. a Bank of America analyst can be trusted, a Morningstar bot that writes research reports cannot), write down all their estimates, take either the mean or average

Because few analysts provide quarterly estimates, you need to use annual estimates instead. But the next twelve months are going to be made of some part of 2024 plus some part of 2025. Palantir's fiscal year is 12/31/2024 so it's a bit less annoying to calculate.

Their most recently reported quarter was Q2 2024, so the next 12 months = Q3 2024 + Q4 2024 + Q1 2025 + Q2 2025[1].

Then you have to calculate enterprise value, which is easier said than done. In a nutshell, it's the total equity value + debt - cash, but there are always minor things to adjust. Equity value is the number of diluted shares outstanding[2] multiplied by today's share price. To calculate diluted shares, you will need to know the options that are outstanding on the company and use the Treasury Stock Method to assume all of the in-the-money options are exercised, with the proceeds from those options being used to buy back shares. Debt you can get from financial statements, unless the company has publicly traded debt in which case you might need to adjust for its current value rather than its book value. Cash you can simply get from financial statements, but there can be issues there too depending on how complex the company is. Add all of that together (subtract cash!) and you get Enterprise Value.

Divide Enterprise Value by NTM Revenue and you'll get a revenue multiple for this company today. But if you want to calculate what the company _should_ be worth relative to competitors, you can do the same thing for all of its competitors, then take the mean/average EV/Revenue of those comps and say "PLTR should be worth this much"

Also separately you can build a DCF if you have sufficient visibility into the future cashflows of the company.[3]

You can take some shortcuts or go even deeper in all of the above. It comes down to how much scrutiny you need for the investment you're making. Are you SAP trying to acquire Palantir? You're going to do all of the above with more detail than I explained. Are you deciding whether to rebalance a bit of your portfolio out of Palantir as an individual trader? Maybe Yahoo Finance Pro estimates are serviceable enough (I wouldn't know).

OR just find an analyst whose views on the company you happen to like and who you think is generally right and look at their multiples so you don't have to do all that legwork yourself. But you'll need to be a client at their bank to get access to their research...

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[1] Some people like to do (days left in 2024 / 365) * FY 2024 estimates and take the remaining days to make up a year * FY 2025, but that's totally wrong for many reasons, the most obvious being that investors aren't updating their models (and thus the valuation multiples those models output) on a daily basis. There's no new news about the company every single day, so estimates should be stable over the course of the quarter.

[2] NOT from the earnings report, as that "diluted shares" for EPS means something else: to simplify, it means diluted over the course of the year rather than today, which is what we want.

[3] For fast growing companies, this is harder because you need to extrapolate all the way until you get to a year with relatively low growth cash flows in order to get to a "terminal year" for a DCF analysis, but if you're projecting 10-20 years into the future, chances are you're wrong!

> . The P/E ratio for a company with negative or near-zero earnings has no meaning.

Only true in a ZIRP world, which no longer exists. Companies have bills to pay, and if you're constantly bouncing around 0 PE gambler's ruin is not far ahead

This is factually incorrect. Plenty of negative P/E companies in the market with positive implied equity value.

The least objectionable defense of my argument is that many such companies are choosing to reinvest so much of their cash flows into more growth because that creates higher NPV than the alternative. If they wanted to, they could be profitable, but they choose not to be in order to be MORE profitable in the future.

Also note EPS is an accounting metric, so it's just "theoretical" stuff. It's not cash flow. These companies in general have positive operating cash flow... including PLTR

Fantastic response, thank you for taking the time.

My pleasure! Wall Street likes to gatekeep this info (it's very simple math but banks charge millions for it) and there's a disheartening shortage of publicly available repositories with this knowledge (most of it can be automated, except for one-off adjustments you need to make for each company here and there for accounting reasons or out of the ordinary occurrences)

The bit I forgot to add is that you kinda have to do the reverse too, if you're valuing the company based on comparables: take their mean multiple, then apply that PLTR's forward revenue to get to some enterprise value, then subtract net debt (i.e. minus debt _plus_ cash now!) and get to equity value. Then divide by the diluted shares (you have to imply the Treasury Stock Method dilution in some somewhat circular Excel math) to get to a final dollar value per share

You can take this one step further and draw line charts over time with these multiples vs. comparables to see how the sentiment has changed for this stock (or for comparables) over time. And many other similar analyses...

Curious why this is downvoted. Crazy high PE / general valuation for a company that as far as I can tell mostly does IT consulting/contracting - sure they are in a growth sector - but still - plenty of other companies can do what they do.