1 John Chapter 4 verses 11-12 state, "Dear friends, since God so loved us, we also ought to love one another. No one has ever seen God; but if we love one another, God lives in us and his love is made complete in us."
Time and time again, the New Testament through the life, death, and resurrection of Jesus Christ teaches about love being one of the most important attributes to model. It is very easy for me to love my family and those closest to me, by my definition of love. But is a test to love those closest to you during times of difficulty, disagreement, and especially those not close to you for many circumstances. God knows better, as the saying love heals all wounds expresses.
For investing, it isn't directly about love, but the extension of love - serving. I really enjoy investing and analyzing companies, just like I love God and am thankful for His compassion and forgiveness for my imperfections. I try to proclaim the gospel, not by forcing anyone to accept my belief, but because God has asked me to from His word. At the same time, I make my best effort to provide transparent information on the management of my portfolio and the analytics and strategies that are used to make decisions.
Palantir Technologies, Inc. (PLTR) seems to be quite a hot topic on some of the chat and social media boards post-earnings. I was a buyer of PLTR yesterday, increasing my position by just over 100%, with the average unit cost basis sitting just above $11. As many know, I am an aggressive growth investor managing an equity-based portfolio. The goal of what I look to do is provide transparency through my financial models and as best as possible, make critical investment decisions under pressure.
From my experience, this is the most important part of investing. Sticking with convictions and maintaining a risk-on approach when markets become highly volatile and unstable.
So, here's a step-by-step perspective of how I assess any individual company, with PLTR as the sample.
It all starts with the B/S and some other high-level metrics. I don't waste time with EPS/EBITDA, GAAP/non-GAAP, etc., as I feel that these are predominantly used by Wallstreet to manipulate markets and enable the ability to control narratives. The stock market is a ruthless place who's history has never changed from the early beginnings where JP Morgan single-handedly manipulated it for his fortune of gains.
For PLTR, there's a lot to like from the B/S as the company has recently gone public. First, PLTR didn't need to raise any money from the IPO process and the company now has $2.6 billion Net Cash (no debt). Second, PLTR has been growing 100% organically with no acquisitions.
Most companies have similar B/S metrics that are key, Cash, Receivables, Inventory, PP&E, etc., but it is extremely important to understand much more complicated examples such as PayPal Holdings, Inc. (PYPL) that will have customer funding assets and liabilities, loan receivables, etc. to make relationships to Cash Flows. As we all know, Cash Flows adjust the B/S snapshot, which is the the core health of every company. PLTR is a financially superior company to many of the thousands of companies publicly available.
Another quick point that can be seen is that the core financial metrics I concern myself with are EV/Revenue and SP to OCF/share. OCF Margin is also important as an indicator of expansion/contraction/stability.
When it comes to Income/Cash Flow performance, again, I am most interested in Revenue and Cash Flow metrics. However, I always focus on how Net Income is reconciled and how working capital flows impact Cash Flows. This is highly important to gauge whether Cash Flow will be able to inflect or not. As we can see, PLTR's Cash Flow has witnessed major Cash Flow inflection this past year. I was calling for this to occur in 2020 based on management's guidance, and it ended up happening one year later. This is a key reason why Wallstreet doesn't focus on Cash Flows, it's much harder to model on a quarterly basis to control narratives.
The other area for Cash Flows Working Capital, will be important to pay close attention to as it may serve as an additional catalyst for further Cash Flow inflection. From the above metrics, it is also important to understand GM and Operating Expenses impacting Net Income. But again, it all comes down to ROI, and I solely measure this on Cash Flow.
The other important aspect is to gauge true adjusted FCF. Most everyone just focuses on Capex, but many companies have line items such as proceeds from stock incentive plans, taxes paid for withholdings on stock plans, financing lease payments, among many other items that are recurring. These are helpful in recognizing areas outside of investment and security transactions versus debt management.
Key metrics are very important for every company, and each company typically tries to provide this information for investors. PLTR hasn't filed its 10-k which divulges these metrics so 2021 is currently blank.
The key areas include modeling PLTR's Government versus Commercial Revenue performance and Segment Contribution. With a little bit incomplete of a story as of right now, we can still see that the core drivers for PLTR's strong performance is predicated on growing Rev per their Top 20 Customers, but also in prior years, overall Average Revenue per Customer. These are powerful perspectives as PLTR is not necessarily dependent upon growing its overall customers robustly, but as the company scales, this may become an accelerating tailwind for growth, and something to keep a close eye on.
Lastly, is the high-level result of the financial model. No financial model is perfect, and the goal here is to strive to take a conservative approach. For 2021, PLTR beat all of my estimates and as I said, had an excellent year.
The critical part is valuation. How do we value PLTR, a company with a minimal history of operating publicly.
A company like AMZN has decades of data to historically reflect on how the company's valuation has been sustained. Without this, it is very difficult to recognize PLTR's fair valuation level as it has gyrated wildly. EV/Revenue has fluctuated from 12 to 37 times, and SP to OCF/share has only turned positive in 2021. We cannot rely upon a historical perspective.
Relative peer valuations have been no help either with Snowflake, Inc. (SNOW) trading 90 times EV/Revenue with minimal Cash Flow inflection. The market is currently in a risk-off trading pattern where there is no justification for valuations at the moment more broadly for aggressive growth, companies like SNOW being an exception. This places PLTR in a tough perspective on making a "clear" valuation decision.
For me, I tend to view a company like PLTR to be fairly valued towards 15 times EV/Revenue and 50-60 times OCF/share, especially during a robust growth phase as the company is currently in. In other words, today's valuation level is where I see the company continuing to be valued as long as top-line growth and OCF margins track towards the financial model estimates.
I'm not going to look to model any further tailwinds until I see some indications that this may become a reality. Overall, as I've said, no financial model is perfect, and valuation as we've seen can change significantly. I was an aggressive buyer of PLTR yesterday because I expect to see sustained top-line growth with stable and/or improving Cash Flows.