Michael Burry is a legend in the investing community. He made a name for himself by being among the first to predict the collapse of the subprime lending market in 2008. His high-stakes bets made a real fortune, netting him $100 million personally and $725 million for his investors. The film that presented these events, The Great Shorthas become must-see in the Wall Street set. So when Burry talks, investors tend to listen.
The famous investor recently made a rather dire prediction regarding the Palantir Technologies(NASDAQ: PLTR). In a 10,000-word manifesto posted last week, Burry laid out his bearish case against the artificial intelligence (AI) and data mining specialist. He listed several possible scenarios, leading to results ranging from $21 to $146 per share. He went on to suggest that the most likely scenario is that the stock has a fair value of $46 per share, or 65% below current levels. “I think Palantir’s recent winning streak won’t last,” says Burry.
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With all due respect, I think he was wrong.
Image source: Getty Images.
Burry spends much of his analysis digging into Palantir’s past, focusing on the fact that the company has been unprofitable for much of the past two decades. He points out that many of Palantir’s sales have been one-off, generating no additional or recurring revenue.
Another point of contention has been Palantir’s heavy spending and significant losses, which have plagued the company for much of its history. Bury also took issue with how the company accounted for its previously deployed engineers and with the inclusion of certain costs in Palantir’s research and development expenses. He also cited “huge stock-based compensation” compared to what he describes as “remarkably few dollars in revenue.”
While these points provide an interesting history lesson, Palantir’s current results provide a compelling rebuttal.
Palantir’s recent results paint a picture of a company firing on all cylinders. In the fourth quarter, revenue of $1.4 billion was up 70% year-over-year and 19% quarter-on-quarter. It marked the 10th consecutive quarter of accelerating revenue growth. This caused adjusted earnings per share (EPS) to jump 79% to $0.25. However, these impressive numbers tell only part of the story.
Palantir’s US government segment revenue rose 66% year-over-year to $570 million. However, the headliner was the US commercial segment, which grew 137% to $507 million.
The results were fueled by unprecedented demand for Palantir’s artificial intelligence platform (AIP). AIP connects to a variety of disparate systems, analyzes data and provides companies with real-time solutions. This helped generate a total of 180 deals worth at least $1 million during the quarter, including 84 worth $5 million and 61 worth $10 million.
Palantir ended the quarter with a record $4.26 billion in total contract value (TCV), up 138%. Moreover, the company’s remaining performance obligation (RPO), or contractually obligated revenue that has not yet been recognized, increased 143% to $4.21 billion.
Finally, Palantir’s so-called “rule of 40” score, which measures the quality of software-as-a-service companies’ earnings, reaches 127%, when any number above 40 is considered financially healthy.
These are simply not the values of a company at risk.
To be fair, there is one area of contention where Burry hits the nail on the head — Palantir’s valuation. The stock currently trades for 214 times earnings and only a slightly paler 74 times next year’s expected earnings.
Despite its rich valuation, Palantir is winning over Wall Street. Of the 27 analysts who provided an opinion, 13 rate the stock a buy or strong buy, up from just six last month. What turned the tide? Palantir’s success report, which illustrated another quarter of impressive financial growth and operational excellence.
Speaking on Wall Street, analysts at DA Davidson disputed Burry’s rating, reiterating their valuation-based neutral rating and $180 price target for Palantir. “We read all 10,000 words of Michael Burry’s newsletter and found no new reason to be concerned about Palantir,” the analysts wrote. They went on to say that Burry’s letter contained “no new evidence or argument” that would change their investment case.
With all due respect to Mr. Burry, I think Palantir’s results speak for themselves. Sure, the stock is overvalued, but the recent 35% drop in share price and rapidly accelerating earnings have already made a dent in the multiple. Investors looking to buy Palantir should consider adding in weakness — such as the recent decline in the stock price — or using dollar cost averaging to establish a position.
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Danny Vena, CPA has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Renowned “Big Short” investor Michael Burry made a dire prediction about Palantir stock. I Think It’s Dead Wrong was originally published by The Motley Fool
