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Daily Update

Daily Brief 12/1 – Red Hot IPOs, Concrete Cool Nikola

Frothy IPOs – Airbnb and DoorDash are both set to start their IPO roadshows this week. Their IPO valuations are exceeding previous estimates with Airbnb seeking a range of ~$30B-$33bn, up from the expected $30bn. DoorDash is upping its target to ~$25-$28bn, higher than its original $25bn target.

Time will tell whether these roadshows will be successful or whether there will be investor pushback on valuations. The IPO market has been red-hot this year, with more than $140bn raised in 383 IPOs on U.S. exchanges, exceeding the previous full-year record set during the dot-com boom in 1999, according to Dealogic data dating to 1995. Speaking of IPOs, we will publish our valuation of a different company seeking an IPO in December later today.

Source: https://site.warrington.ufl.edu/ritter/files/IPOs2019Statistics.pdf

Nikola – Per Bloomberg, “General Motors Co. scaled back a partnership
with clean-energy trucking startup Nikola Corp., scrapping a tentative deal to jointly build an electric pickup truck and replacing it with a non-binding agreement to supply hydrogen- fuel technology.”

The new deal terms don’t include GM taking an equity stake in Nikola and it drops the plans for GM to manufacture the Nikola pickup Badger truck. Nikola was down 26.92% on the news yesterday, but it maintains a $7.8bn valuation. Let us be clear, this company is worthless. They have no product, no technology, no real plans that pass the smell test. Their founder and ex-CEO resigned abruptly in September following a report by famous shorter Hindenburg Research and has yet to be found. Nikola’s (we assume now former) Director of Hydrogen Production/Infrastructure is the ex-CEO’s brother who’s experience in infrastructure amounts to paving driveways and pouring concrete in Hawaii. Do we need to go on?

You can read the whole Hindenburg report here.

Travis Milton applying epoxy flakes to staircase in Hawaii prior to joining Nikola and allegedly revolutionizing the hydrogen fuel industry.

Moderna vaccine: Moderna applied on Monday for Emergency authorization of its Covid-19 vaccine to the FDA. The company asked the FDA to examine its data showing the vaccine is 94.1% effective at preventing Covid-19 and 100% effective at preventing severe cases.

Just to give you an idea of the reception, Dr. Paul Offit, a member of the FDA’s vaccine advisory committee said, “This is striking … These are amazing data.” Not to be outdone, Moderna’s Chief Medical Officer Dr. Tal Zaks said, “”It was the first time I allowed myself to cry .. we have a full expectation to change the course of this pandemic.” Moderna rallied 20.24% on the news, which is strange because this was expected. Julianna Tatelbaum from CNBC says:

Also, Pfizer’s first ‘mass air shipment’ vaccine arrives in the US.

Tweets and Charts we like:

Crazy month

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Amazon hired an army the size of Napoleon’s when he invaded Russia

Buffet on short selling:

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For you traders out there …

The Clorox vs the Amazon and Zooms of the world ..

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

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Daily Update

Daily Brief 11/30 – Q2 2021 Vaccination Rollout

Covid Task Force Promises Rapid Rollout: We, from a federal perspective, have promised and set everything up so we can quickly review those EUAs (Emergency Use Authorization) and hopefully start sending out vaccines within 24 to 48 hours,” US Surgeon General Jerome Adams said on “Fox News Sunday.”

Adams continued that he expects 40 million vaccine doses to be produced by the end of the year and for most Americans to have access to a vaccine by early in the second quarter of 2021. American hero, Anthony Fauci also indicated on NBC’s “Meet the Press” that the government will “almost certainly” begin vaccinating portions of the first priority population by the end of December. Besides healthcare workers, 87 million essential workers are in meat/food processing, municipal waster/wastewater, public transit, police, firefighters, and tentatively teachers who will all be first priority. More here

Oil Market Disagreement: A panel of OPEC+ ministers couldn’t reach an agreement on whether to delay January’s oil-output increase, leaving the matter unresolved. The Organization of Petroleum Exporting Countries and its allies are a 23-nation network that pumps more than half the
world’s crude.

Per Bloomberg, “While Russian Deputy Prime Minister Alexander Novak spoke in favor of postponing the supply hike that’s currently scheduled to happen in the new year, the United Arab Emirates and Kazakhstan were opposed.” Very nice. Remember, it was an OPEC disagreement that led to the negative oil spot price back in April of this year.

WTI Price source: Oilprice.com

Ant Faces Slim Chances: Per Bloomberg, ” The chances that Jack Ma’s Ant Group Co. will be able to revive its massive stock listing next year are looking increasingly slim as China overhauls rules governing the fintech industry, according to regulatory officials familiar with the matter.”

Ant is still in the early stages of reviewing changes needed to appease Chinese regulators. This is of course a blow for Alibaba Group which owns a third of Ant. If you are interested in the inner workings of the Chinese business world and political world, we recommend this article which talks more about the behind the scenes on this IPO debacle. Article

The strange, cryptic Xinhua News Agency article on Ant Group's IPO - TLD by  MW | DO
“Ma” means horse, “Yun” means cloud. The Chinese government used this painting in an article to send a warning to jack Ma that he is nothing but a cloud.

Tweets and Charts we like:

Only the US is investable change my mind

Value vs Growth Rotation

What shines isn’t always gold …

Consensus is bullish, we talked about this last week

We like this take.

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

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Daily Update

Daily Brief 11/27 – Thanksgiving Trading Volume

Trading Volume highest in years: Trading volume typically dips in the days before and during holidays, expect a light trading day volume-wise in US markets today, but not this year. Per Bloomberg, “Volume on the tech-heavy Nasdaq Composite Index averaged 1.07 billion shares per day through Wednesday — making it the biggest lead up to Thanksgiving since 2004 and almost double the volume of last year, when about 580 million of shares were traded, according to data compiled by Bloomberg.”

Nasdaq $QQQ volume vs avg at the time as a proxy

We think this massive shift in volume is primarily due to retail traders (like you) rather than any increased institutional activity, for now. Increased trading is good because it means more liquidity, therefore better price discovery.

AstraZeneca Vaccine Questions: The AstraZeneca vaccine is undergoing an additional global trial to clear up the uncertainty they caused with their results earlier this week. There are unanswered questions after the company acknowledged that a lower dosage, that was administered by mistake because of a manufacturing error, appeared more effective. The company and its partner, Oxford University, initially didn’t disclose the error and other details, leading the scientific community to have concerns about the vaccine.

AstraZeneca says its COVID-19 vaccine needs 'additional study' | United  Kingdom | Al Jazeera

“Now that we’ve found what looks like a better efficacy we have to validate this, so we need to do an additional study,” AstraZeneca CEO Soriot said in his first interview since the data release. The study will most likely be another “international study, but this one could be faster because we know the efficacy is high so we need a smaller number of patients.”

Meanwhile, the NYT reports that the US military’s role in vaccine distribution will be behind the scenes.

Money Markets Funds: JP Morgan predicts that the supply of investable assets will shrink by about $300bn, while the amount of cash chasing these assets has doubled to $3 trn. A key factor on the supply side is that the amount of Treasuries is predicted to shrink as the US government replaces shorter-term debt it borrowed to pay for the 2020 stimulus bills with longer-term debt. Meanwhile, the demand for these short-term securities is rising. On top of this, Central Banks plan to keep its policy rate close to zero at least through 2023. You will hear us predict this often, but rates will never rise again and are far likelier to go negative during the next episode of economic stress.

money market mutual funds Archives - Alt-M
Will money market investors face the grim scenario JPM outlines? The thesis makes sense to us

Tweets and charts we like:

We think it’s definitely possible!

Corporate profits rebounding underpinned the stock market recovery

Forward P/Es of major US indices courtesy of Jake

Bicycle index bubble. Bubble charts are so fun. Can’t wait to see today’s EV bubble on a chart 10 years from now

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

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Daily Update

Daily Brief 11/25 – Hedge Funds can be wrong too

Hedge Funds get it wrong too: Back in June of this year, value investing legend Jeremy Grantham took a net short position in US stocks for the first time since 2008. Grantham articulated his reason in a letter to his funds investors saying, “we have never lived in a period where the future was so uncertain” and yet “the market is 10% below its previous high in January when, superficially at least, everything seemed fine in economics and finance. And if not “fine,” well, good enough. The future paths include many that could change corporate profitability, growth, and many aspects of capitalism, society, and the global political scene.”

S&P 500 since June, oops

Needless to say it was the wrong call. Grantham, like many others in the financial industry, highlighted how disconnected the market and the economy were becoming and further pointed out, “”the current P/E on the U.S. market is in the top 10% of its history… the U.S. economy in contrast is in its worst 10%, perhaps even the worst 1%…. This is apparently one of the most impressive mismatches in history.”

You can read the investor letter here. What worked yesterday, doesn’t work today. And what works today, won’t work tomorrow.

Dry Ice: Per Bloomberg, “United Parcel Service Inc. has set up its own dry ice production and will provide portable, super-cold freezers to its health care customers as the courier prepares for the massive roll out of vaccines against Covid-19. UPS can make as much as 1,200 pounds (540 kilograms) of dry ice an hour near its Worldport air hub in Louisville, Kentucky, and can ship it the next day to U.S. and Canadian hospitals and clinics”

UPS is also offering to deliver and hook up the small freezers, made by Stirling Ultracold, for care providers. I know what you’re thinking, an no Stirling Ultracold is not a publicly traded company. These enhanced capabilities underscore the quick vaccine rollout that is weeks ago.

Stirling Preps Global Communities for COVID-19 Vaccine
A Stirling Ultracold freezer

Half the Labor Force Works from Home: According to the US Census Bureau, 37% of employees were teleworking between late October and early November. However rates can vary widely by state and city, depending on a variety of factors.

In big cities, the share of adults in Boston, Seattle, Los Angeles, New
York and Atlanta who say they were working from home ranged from
45% to 55%. In San Francisco it’s 56.2%, in Washington DC, 55.6%.

Lower-earners don’t have the same opportunity to work from home as higher earners. More than 61% of households earning more than
$75,000 a year said they were able to substitute telecommuting
for some in-person work. For those earning less than $75, it’s about 21% according to the Census figures. Is work from home here to stay? We think the greatest shift in % of workforce working from home will tilt towards developers, coders, and IT professionals. We can think of some of the immediate ramifications being increased cloud usage, more teleconferencing, less travel – helping obvious names like MSFT, AMZN, ZM, among others. However the second order effects of this shift in work will be where the greatest upside in this theme will be.

Working from home: When it works and when it doesn't
If you’re a city white collar professional, chances are this is what you look like

Tweets and Charts we like:

This is a Beta rally not a value rally. There is no value in Energy. Beta defined here

Quantian isn’t wrong here. Have you heard about Moderna pre-Covid?

Junk rally is appropriately named too.

Gold Flows.

Stonk Flows:

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

Categories
Daily Update

Daily brief 11/24 – Covid Travel Pass

Covid Travel Pass: The global airline lobby IATA is working on a mobile app that will help travelers demonstrate their coronavirus-free status. This is a part of the so-called Covid passport as vaccines near approval. Per the IATA, “The Travel Pass will display test results together with proof of inoculation, as well as listing national entry rules and details on the nearest labs”

IATA develops digital Travel Pass to support safe return of flying - The  Moodie Davitt Report - The Moodie Davitt Report

With travel demand still hovering at 60% down y/y in the US, this technology driven move to monitor travelers and their so-called Covid-credentials is a good one. The IATA has also predicted that carriers will lose almost $39bn in 2021, that’s on top of a $118.5bn deficit in in 2020. We hope to see more actions like this adopted in other areas of the economy, especially in travel and leisure to accelerate demand levels reaching 100% of 2019 levels.

Source: TSA

The Gambit that paid: off Per Bloomberg, ““The Queen’s Gambit,” the buzzy, female-led drama set in the 1960s chess world, has become Netflix Inc.’s most popular limited scripted series ever.”

62 million households watched the show in its first 28 days on Netflix. More proof that the future of entertainment is direct-to-consumer and the shift is accelerating. Disney has noticed and following its Mulan release on Disney+, is looking to release “Cruella”, “Pinocchio”, and “Peter Pan and Wendy” on their streaming platform. Will there be a future for movie theater companies such as AMC and CNK?

Disney Plus: how to find your favorite movies and shows - Polygon

What’s in store for 2021?: With the market in bull delirium, let’s take a quick look at what opposing forces are on the market’s mind:

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Source: @NDR_Research

A covid vaccine has made the market look past this year and into the future. The promise of fiscal stimulus and an accomodative Fed, Janet Yellen has also been named Treasury Secretary signifying the Fed and Treasury will work in tandem, will drive more money circulation and lending, hence indirectly business activity. housing market strength is expected to continue with mortgage rates at historical lows and millennials finally moving out of their parent’s house. Strong global growth is expected as a result of similar policies abroad and a Covid demand bounceback. The US Dollar is expected to weaken as a result of these policy decisions, further helping exporters who are already seeing demand increase globally.

Let’s address the risks – Covid progression and localized lockdowns are certainly a risk, but with a vaccine there is light at the end of the tunnel. A slow labor market recovery has not materialized, but there are signs of deceleration in recovery. There has yet to be the sort of bankruptcy increase we were expecting to see, with commercial bankruptcies in the NYC district court being below pre-virus levels.

Tweets and charts we like:

Boomers were born into a Bull Market and yet still complain

Value outperforming Growth across every industry this month

Vaccine Availability from Credit Suisse

S&P profit margins bounce back in a yuge way

A rebuttal to our stocks are relatively cheap piece last week

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

Categories
Daily Update

Daily Debrief 11/23 – Vaccine Distribution Right Around the Corner

Vaccine Distribution: The biggest news of the weekend came from, Moncef Slaoui, head of Operation Warp Speed, the Trump administration federal vaccine development program, who said on CNN on Sunday that the first doses of the Pfizer and BioNTech vaccine will “hopefully” be administered by mid-December. This comes after Pfizer applied for emergency use approval from the FDA on Friday. FDA vaccine advisers will meet from December 8 to December 10 to discuss approving the vaccine, a mere formality – it will be approved.

Beyond the Pfizer vaccine, UK company AstraZeneca, which is developing a vaccine with Oxford University, has said it’s vaccine was up to 90% effective. This is important because not only is having more than one vaccine for manufacturing and distribution purposes a good thing, the AstraZeneca vaccine doesn’t have to be stored at ultra-cold temperatures like the Pfizer and Moderna vaccines, but the AstraZeneca vaccine is also reportedly particularly promising for the elderly.

In related news, Trump coronavirus vaccine chief has had ‘no contact’ with Biden transition team. That’s good.

Casino Bounceback paused: Per Bloomberg, “Nevada will cut capacity at casinos and other public venues starting Tuesday to lower the spread of coronavirus infection, according to Governor Steve Sisolak. Gaming operations and venues including restaurants, bars and gyms will be reduced to 25% of fire-code capacity, down from 50%, he said.”

Several other states have begun to shutter casinos and cut hours, such as Illinois, Michigan, Ohio, Massachusetts, and New Jersey. Regional casinos were performing quite well, and in many states were up y/y in gaming revenue once reopened over the summer. This isn’t much of a surprise, but is still a negative development. We would recommend looking at casino names with large China/Macau exposure where the situation has been inflecting up with gaming revenue increasing 222.8% in October from September levels (keep in mind this is 72.5% down y/y). Some names with large Macau exposure:

  • MGM – 22.4% 2019 revenue in China
  • WYNN – 69.7% 2019 revenue in Macau
  • LVS – 64% 2019 revenue in Macau, 7% in Singapore (also looking to offload Vegas assets, might have to change that the name to Macau Sands though)
Macau Casino Revenue Fell 8.5 Percent in November
Macau has gambling revenue 3x that of Vegas

Charts and Tweets we like:

Monday morning Earnings:

Valuation still matters, even in markets like these. Valuations will matter again, but for now enjoy the bull ride.

No short to be found.

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This is why you don’t listen to the talking heads.

Accountants don’t matter.

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider following this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

Categories
Valuation

Palantir Valuation – Opening the Black Box

  • Palantir Technologies was founded in 2003 and the company offers a unique and powerful operating system (OS) to government and commercial clients
  • PLTR has found its stride in providing solutions to the US government, particularly in aiding intelligence, counter-terrorism, and military.
  • PLTR provides anti-money laundering and flight operations solutions to commercial clients
  • With ~125 customers today on lumpy deals and limited visibility into future opportunities, let alone conversion rates, PLTR seems a company with a binary outcome to us. Will they or won’t they bring more customers on the platform, a single customer add changes the company’s outlook, and as a result, valuation, significantly.

Company Background: Palantir’s data / analytics platform is differentiated with its “full stack” approach. For businesses providing a product or service, a full stack approach means addressing the complete value chain from end-to-end, controlling the entire customer experience instead of providing a partial solution that relies on licensing to, or integrating with, existing businesses serving the target market. Palantir technology is a one-stop shop.

Despite having a low number of customers, once PLTR penetrates the customer and becomes a core data platform, thanks to this full-stack approach they are able to expand rapidly. Average revenue per customer has been growing at 30% since 2009, reaching $5.8mm as of 2019. The top 20 customers have a spend even greater at $23.6mm. This sort of revenue per customer growth is indicative of PLTR’s ability to prove and expand into new use cases once a customer is onboard. The PLTR platform addresses a variety of workflows including data management, integration, app development, security, analytics, supply chain, enterprise resource planning (ERP,) and the mythical ~AI~ among others.

Source: Company Q3 presentation
Source: Company

The revenue growth is impressive, with Q3 growth at 52% y/y and full year 2020 revenue to be 44% year-over-year. However, is this revenue growth sustainable? There are signs of lower confidence in growth – mainly customer count going down from 133 at the end of 2019 to 131 at the end of Q3, weak headcount increase of +2-3% y/y in FY21, and operating expense decreasing 28% y/y which is a huge number and unusual for a company in high growth mode.

Palantir’s Business Model: PLTR goes to market with a direct sales force, with heavy involvement from senior management in the early stages. Sales cycles can be long, with heavy implementation services required to get customers running. Sale engineering and pricing vary on the scope and scale of the project. PLTR’s business model has three phases: Acquire, Expand, and Scale.

Source: Company Q3 Presentation

Acquire – PLTR offers short-term pilot deployments of their software at little to no cost to attract new customers and further monetize existing ones. These pilots lead to initial losses. Customers in the Acquire phase are defined as customers who contribute less than $100k in revenue in a calendar year.

Expand – This is the phase where PLTR would begin to see an inflection in revenue and margin. Customers in this phase are defined as those generating more than $100k in revenue in a calendar year, while having negative contribution margin throughout the same period.

Scale – With 95% of revenue coming from existing customers, the company’s ability to scale within its base is crucial for its growth strategy. Palantir’s system is very sticky, once the software is installed and configured, the customer can develop further apps and software to use on top of the platform, contributing to further usage.

Total Addressable Market (TAM) opportunity: Palantir estimates their TAM to be $120bn based on their bottoms-up analysis on customer spending levels across the commercial and government sectors.

Company management believes the core product is applicable to commercial customers with more than $500mm in revenue, roughly 6,000 commercial companies. The management estimated commercial TAM of $56bn, implying $9mm per commercial customer. This sort of TAM calculation signifies PLTR has penetrated less than 1% of their potential commercial market.

For government customers, management estimated a $63bn TAM based on their assumptions around software and consulting services penetration of US and US allied governments. We use Goldman’s estimation of government spend based on NATO members for U.S. allies and the spend based on Gartner FY24 IT spend estimates. This sort of TAM calculation signifies PLTR has penetrated once again less than 1% of their potential government market.

Source: Company estimates, Goldman Sachs Global Investment, Gartner, Our estimates

Sell-side estimates vary from $55bn at Citi, who utilized a top-down methodology, and $105bn at Goldman based on similar methodology to Palantir’s estimates. Regardless of methodology, these sort of TAM levels imply PLTR has penetrated less than 0.8% – 1.8% of their total market opportunity. Clearly, there is room to run if management is able to execute effectively and grab more market share.

Government services: Recent strength in the government segment was primarily due to the results of a recent lawsuit – specifically a lawsuit in 2016 against the US Army that allowed the army to consider commercially available products instead of using strictly custom built software solutions. In 1H20, the US Army represented 31% of total government revenue vs 16% in FY 2019. While PLTR has worked with other government agencies such as the Dept of Defense, US FDA, CDC, and NIH, there is still a large customer concentration within the US Army. While PLTR has signaled its attempts to broaden into other western-allied governments, it is unclear how much traction, if any, the company has outside the US government. Some government customers have begun to expand into commercially focused product such as Foundry, which is a positive theme for future cross-selling opportunities.

Government contract backlog provides some visibility into future revenue, at least more visibility when compared to the commercial segment. PLTR has indefinite delivery, indefinite quantity (IDIQ) government contracts totaling $2.6bn as of 2Q 2020. These are awarded contracts, but the funding has yet to be determined and is not guaranteed. With little certainty surrounding funding and timing, these contracts represent potential upside to our estimates.

Commercial services: In 2016, Palantir launched its Foundry platform – a centralized data OS for commercial customers. Customers can leverage the platform to manage, filter, and visualize large datasets. Sustainable growth in the commercial segment will hinge on efforts to broaden use cases and leveraging sales reps to drive top line growth.

With ARPC at $5.8mn as of the last 9 months of 2020, PLTR has a meaningful opportunity to expand via new use workflows and growth in users. Sales cycles and implementation times can be long given PLTR’s complexity, but once commercial orgs see and realize the value, spending growth can grow at a rapid rate. It is critical that PLTR reduce sales times and becomes more efficient in implementation in order to diversify its customer base as its largest commercial customer represents greater than 20% of total commercial revenue.

While the company has expanded into various industries and use cases over the last several years, its customer count remains among the lowest in growth software – 131 (including government entities). Today, product market fit remains narrow and tailored to specific scenarios or one-off situations (table below). The use cases also tend to be concentrated around a few industries such as energy, transportation, financial services, and healthcare. Near-term visibility in the commercial segment remains low and hinges entirely on the execution and size of a few contracts per quarter and year.

Quarterly Earnings recap: Palantir put up a strong 3rd quarter in its first quarter as a public company. There was ongoing momentum for the government business, as revenue growth accelerated from 56% last quarter to 68%. Most impressive, the commercial business grew 35% y/y, up from 17% in 2019. Total revenue growth accelerated to 52% y/y, up from 43% last quarter.

The company also announced efforts to modularize (flexibility around the full-stack solution) its Foundry product and to accelerate the pace of app development, efforts which will help drive broader product market fit in the commercial segment and drive more sales. We like these solutions as it shows Palantir is adapting to the needs of its customers in order to gain more customers. The full-stack or perhaps a not-so-full-but-fuller-stack solution capability can be expanded once a customer is up and running on Foundry. These sorts of efforts will be crucial in diversifying the customer base.

Adjusted operating margins improved and were a positive 25%, up from -49% a year ago. This healthy margin expansion was primarily due to greater efficiencies in acquiring and scaling customers. We expect PLTR to generate further operating leverage with a more experienced sales force and account management teams.

Source: Company Q3 Earnings

PLTR Comparables Trading Multiples: Shares are currently trading 28x/21.3x CY20/CY21 sales estimates.

This was post-IPO and no longer relevant

For core comparable companies, we use software companies with high growth estimates. For the broader comparable companies, we use a wider range of software companies. High growth software companies are currently trading at an average of 18.5x 2021 sales and the broader comparables market is trading at 18.8x 2021 sales. Palantir is currently trading at 21.3x 2021 sales. Across every EV / Sales metric for every year, PLTR is trading at a significant premium over the core comparables, the wider broad comparables, and the total of both trading multiples.

However, this premium can be justified, because as we can see PLTR’s forecasted revenue growth is higher than the comparables estimates. However, PLTR also has higher customer concentration and lower revenue visibility than most of the comparable companies, so this premium is especially risky at current valuation levels.

Source: Bloomberg Consensus Estimates

These two factors combined: customer concentration + lack of revenue visibility (negative) and higher forecasted revenues (positive), does the stock deserve its premium?

Valuation: We use an Enterprise Value / Free Cash Flow valuation for this company. We get a $20 target price which is based on 37.5x EV/FCF multiple on 2025E Free Cash Flow of $1.165bn. We also get $4.44 bn in 2025E revenues.

We lay out a range of Bear/Base/Bull cases with the main drivers of the valuation and our Base Case assumptions being:

  • Number of net customer adds – 5 per year from current 131 number
  • Avg. Revenue per Customer (ARC) growth – 18.8% CAGR in avg. revenue per customer
  • Gross Margin % – a hefty 82%
  • Opex Margin % – a hefty 45%
  • Capital Expenditures – continuation of historical and very low
  • Free Cash Flow Multiple – 37.5x which is consistent with other high growth software data / analytics companies
Source: our estimates

For purposes of establishing a trading range for the stock, here is a grid of 2025E revenue scenarios given total customer count and ARC CAGR. As you can see, the amount of revenue PLTR is able to squeeze from customers has a very large effect on the calculation.

Source: Our estimates

The depending on each of these future revenue scenarios, based on different free Cash Flow margins and valuation multiples, we get a range of stock prices. As you can see, for purposes of our Base Case, the FCF margin is 26.2%.

Source: Our estimates

Key Risks: Simply put, there are a lot of unknowns with this company. This is one of the most binary companies I have come across, it will either be a massive hit or a dud and I attempt to value it accordingly. This binary opportunity is primarily because of limited visibility into this company’s sales. Palantir targets large-scale opportunities within large governments and commercial entities. These projects have high costs, long sales cycles, and are incredibly complex. A quarter’s earnings hit or miss and yearly growth can depend on a few contracts.

Customer concentration and a small base is another risk. Although PLTR has made some progress and decreased their total revenue attributable to the largest 20 customers from 68% the first 9 months of 2019, to 61% the first 9 months of 2020, PLTR has the highest customer concentration among public growth software providers. A significant decrease in revenue from a top customer can have an adversely large impact on the company.

Competition is significant. PLTR’s full-stack approach may be abrasive and put it at odds with other tech vendors in the data / analytics space. Some organizations may see a relationship with PLTR as too limiting and would prefer more flexibility to use some of the best of breed tools from other software companies outside of PLTR.

r/wallstreetbets - Palantir Valuation - Opening the Black Box

Recent and near-term expected hiring doesn’t inspire confidence in significant growth. Palantir expects to only grow headcount 4% in FY20 and operating expenses have notably declined, with guidance continuing this decline.

r/wallstreetbets - Palantir Valuation - Opening the Black Box

Palantir is not a young company, it was founded in 2003. Although PLTR is now hitting it’s stride and making significant progress and growth, the company has historically generated operating losses and negative cash flow. This also ties in with the lack of detailed disclosures from the company. In its S-1 (IPO filing) the company provided 6 historical quarters, but only included the income statement. Without more information, it is difficult to understand or predict the seasonality of the business appropriately.

Key catalysts: Increased commercial adoption is a massive catalyst for PLTR. If the company is able to improve adoption by introducing more flexible workflow solutions that meet a larger segment of the commercial market, the addressable market opportunity is incredible and can be swift. In addition, improving sales efficiency could drive higher profitability than we have currently modeled.

The company is currently profitable with 25% adjusted operating margins in Q3 2020. Management highlights the release of Apollo, the continuous delivery software that powers the Foundry and Gotham platforms, as the main driver in these efficiency gains. The efficiencies generated by Apollo and more ‘productized’ offering have resulted a lowered average implementation time and decrease in the days it takes to ERP integration going.

Here is the model for download:

Thanks for reading. If you like this post, I do weekly valuations, let me know what company you want to see next. Follow this blog and @millennial_mkts on twitter for future valuations.

This post is not investment advice.

Categories
Daily Update

Daily Debrief 11/20 – Overnight Trading and Wide Open Credit Markets

Night Owls trading: Buying the SPDR S&P ETF at the market close in New York and selling it at the next day’s open has historically yielded a better return than buying the ETF at market open and selling at the same day close. Most risk events such as news, earnings, analyst upgrades/downgrades, etc. takes place outside of normal trading hours, leading to the performance we can see in the chart below.

Source: Bespoke Investment Group data

However, 2020 has been a year unlike any other, and this phenomenon has only just started to work again thanks to the recent vaccine rally. Paul Hickey, co-founder of Bespoke Investment Group, spoke to Bloomberg and said, “Holding the market overnight this year was a very risky trade. A lot of the uncertainty is behind us. Investors willing to take the risk to hold the SPY for 17.5 hours are again being rewarded more.”

Source: Bespoke Investment Group data

Carnival can’t get enough: Like an addict that just can’t get enough, Carnival has returned to the bond market to raise more cash. Per Bloomberg, “Carnival, which earlier this year raised almost $9 billion
by issuing bonds and loans backed by its idled ships, is planning to price the equivalent of $1.59 billion of unsecured notes in dollars and euros by the end of the week” The fact that this is an unsecured deal, with no collateral is what’s so important as this is the first deal with no ships backing the deal as the company continues to burn close to $500mm/month. This deal tests the credit market rally and the market’s appetite for riskier debt. We can safely say credit markets are wide open for the riskiest of issuers.

15 Things to Expect on a Carnival Cruise
Going down the slide of risky debt issuance yay

Cruise Ship Valuations: We do a similar valuation exercise to that of airlines from Wednesday. As we can see, cruise lines are more discounted compared to history when compared to airlines. The average Enterprise value recovery is 79% for the top 3 cruise lines, a 2x EBITDA multiplier discount.

Our estimates, Bloomberg data

This signifies the belief that the cruises will take longer to bounce back than airlines after a vaccine is fully distributed. Most sell-side estimates have a ramp-up time of 6-8 months for cruise companies to be fully operational, and they additionally don’t expect a full return to 2019 levels until 2024. However, given the higher discount, the upside on cruise names is implied to be higher as well. That’s the type of risk that pays when it works out. *Note* This valuation is before the most recent CCL debt raise and equitization of the convertible bond to equity. The bond convert is a wash, as it’s value dilutes to equity and does not affect the EV calculation.

Energy doesn’t care about politics: There is a popular myth, touted by Energy executives, that energy companies perform better under Republican administrations. However, there has been arguably no administration more punishing to energy shareholders than the Trump administration. $XLE is down close to 50% under the Trump admin, and $XOP is down close to 67%. Both ETF’s enjoyed their highs in the Obama years, although admittedly tracked down in his final two years.

XLE is an ETF that is dedicated to correspond to the performance of companies in the Energy Select Sector index, with Chevron and Exxon making up 50% of the ETF currently. XOP is an ETF that tracks the S&P Oil & Gas Exploration & Production Select Industry Index, with gas and shale plays being the primary constituent companies.

XLE Performance
XOP Performance

A tale of two retailers:

L Brands: Bath & Body Works sales grew 55% year-over-year (y/y) and Victoria’s Secret sales stabilized to be down -14% y/y as ecommerce gains were offset by in-store declines. BBW margins increased with merchandise margin rates up significantly due to improved inventory management and lower promotions. Management noted that digital revenues grew 42% for Victoria’s Secret.

L Brands Quarterly Earnings Report

Macy’s: Net Sales for Macy’s were down 21% and the margins decreased another 4.4%. Within this, store sales declined ~36% Y/Y and digital sales grew 27%.

Macy’s Quarterly Earnings Report

This is the story for Brick and Mortar retailers – can ecommerce presence be grown quickly enough to offset in store losses. The pandemic accelerated the ecommerce trend and we can now clearly see the dichotomy of winners and losers. LB Brands was able to execute on their online presence, while Macy’s has yet to do. As an aside, I bought a coat off Macy’s but returned it in person. Is this ecommerce revenue and an in store contra revenue account? Not sure, that’s a question for Macy’s corporate accounting team while they still have a job.

Chase Consumer Card Spending Tracker: JP Morgan is saying that card users are exhibiting the same type of spending behavior as in March – spending more at discount stores and for groceries, while spending less on entertainment and eating out. They note that these swings in consumer behavior are less pronounced than the suddenness experienced in March/April. They also note that there was a notable boost on November 11, traditionally “Singles Day” in China. Regardless, we are close to achieving flat y/y consumer spending according to their metrics, compared to -40% at the peak of pandemic fear.

Tweets and Charts we like:

Cash is King: Companies Goldman thinks will improve Free Cash Flow over the next 2 years:

Cutting Losses: Companies Goldman thinks become Cash FLow positive next two years:

Travel Demand won’t reach 2019 levels until 2024 according to airline management.

If the S&P 500 gains hold through the end of the year, 2020 will have seen the largest intra-year drawdown that finishes the year with a positive return

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Source: Ben Carlson @wealthofcs on twitter

Fewer fund managers are overweight cash than at any time since 2015.

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Tesla is more valuable than Walmart

That’s your millennialmkts daily debrief. Thanks for reading, if you like this content please consider followin this blog and following us on twitter @millennial_mkts

Posts are not investment advice or endorsements.

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Daily Update

Daily Debrief 11/19 – Are Valuations Stretched? Absolutely. But Relatively?

Consumer Balance Sheets are improving: A new report from the Federal Reserve Bank of New York showed credit-card balances declined by $10 billion to $810 billion in the third quarter of the year. This, after a $76 billion decline in the second quarter, is the steepest drop since 1999. The big falls reflect both lower levels of spending due to the coronavirus pandemic as well as an effort by consumers to use extra cash to pay down debt. Overall household debt rose by $87 billion, or 0.6%, to $14.35 trillion in the third quarter compared with the second quarter. This is primarily due to mortgage activity underpinning the red hot housing market as well as auto purchases and a millennial favorite, student loans. Continue to pay off that credit card debt, millennials, maybe buy a house at record low rates too.

Apple – “Look we are a kind monopoly”: Apple is cutting the fees charged to most developers who sell software on services on its App Store by half. Per Bloomberg: “The company is lowering the App Store fee to 15% from 30% for developers who produce as much as $1 million in annual revenue from their apps and those who are new to the store.” This decision won’t affect major apps like Netflix or Spotify.

App Store - Apple
Apple Apps

From Goldman Sachs, “SensorTower data shows that total revenue to developers sized ~$2.9m and larger from Apple’s FY20 of App Store sales is ~$43.5bn. We estimate that this represents about $16.9bn of revenue for Apple or ~92% of total App Store revenue for Apple over that period. This implies that sub $1m developers represent something less than 8% of total App Store revenue but the size of the pool of revenue from $2.9m down to $1m is not available.”

Apple claims this is a way to incentivize smaller developers to invest in their businesses amid the pandemic by using their new savings. Apple has faced ongoing scrutiny from government regulators and developers about the percentage of revenue it takes for App Store purchases. We think this is a response to that scrutiny to buy some good will, especially to anti-trust regulators such as the ones involved in the ongoing investigation in Europe.

Stretched Valuations: With >20x Next Twelve Month (NTM) P/E for the S&P 500, current valuations are in the 90th percentile historically. Given the pandemic, extraordinary measures of supportive monetary and fiscal policies were enacted that otherwise would not have been. As the economy recovers, these policies will remain in place to support the recovery. These are the forces that are underpinning this absolute high level of valuations. We don’t expect rates to rise until 2025, if ever meaningfully again.

Source: FactSet, Compustat, IBES, Goldman Sachs Global Investment Research

However, relatively given these circumstances, valuations don’t look as stretched. In this context, GS compares the S&P earnings yield vs corporate and government bonds. S&P valuations are currently in the 40th percentile for the index compared to historical levels, and 20th percentile for the median stock in the index. The five largest stocks in the S&P are currently trading around a 29x 2021 estimated Earnings per Share (EPS), compared to 18x for the other 495 constituent companies.

Source: FactSet, Goldman Sachs Global Investment Research

Staples, Materials, Utilities, Health Care, and Financials are all trading well under their median historical relative P/E multiples. Discretionary, Energy, Info Tech, and Industrials are all well above their median P/E multiples. What will it take for Financials and Health Care to creep back up to their historical medians?

Source: FactSet, Goldman Sachs Global Investment Research

FAAMG S&P dominance: The top 5 largest stocks have returned +48% year-to-date compared to only +4% for the remaining 495 companies. In fact, the remaining 495 companies would be flat to negative if not for the recent rally. We think there is a lot of opportunity in the remaining 495 companies based on a robust economic recovery in 2021 and beyond.

Source: FactSet, Goldman Sachs Global Investment Research

This recent performance in FAAMG has contributed to the record concentration of market cap in the 5 largest stocks as they account for 22% of the S&P 500 compared to a historical average of 14%. Is this sort of market cap concentration among a few names sustainable long-term? History says no. However, will a hypothetical de-concentration occur because the rest of the index catches up or the top 5 trade down?

Source: Compustat, Goldman Sachs Global Investment Research

Lockdowns Work: You can argue the ethics and government overreach of lockdowns, but one thing that can’t be debated is that they overwhelmingly work. France and Spain have turned a new corner since lockdowns were first announced 3 weeks ago.

Source: Worldometers.com
Source: Worldometers.com

Germany and the UK, having soon followed France’s, where the situation was the most dire in the EU, lead, are also beginning to turn the corner. This approach is indeed the primary cause of these countries beginning to regain control of the situation.

Source: Worldometers.com
Source: Worldometers.com

Tweets and Charts we like:

NIO has been the main beneficiary but choosing Chinese EV’s is like getting a lottery ticket

Not all low multiple stocks deliver great returns, good portion of the time low multiples are justified.

Owning Microsoft throughout the bubble of 1999 was painful. Is the stock at a similar valuation bubble? Would argue Ballmer wasn’t a great CEO, though.

Are oil companies due for a break-out? Take a look at this oil company ETF chart.

Algorithms trading on headlines

That’s your millennialmkts daily debrief, thanks for reading and good luck!

Posts are not investment advice or endorsements.

Categories
Daily Update

Daily Market Debrief – 11/18 $15 Trillion Consumer Cushion

https://anchor.fm/millennialmkts/episodes/Daily-Market-Debrief–1118-15-Trillion-Consumer-Cushion-emlgpj

Consumer Saving: Central to the post-Covid bull thesis is extra consumer savings driving the increase in demand. Will this theme materialize in the bull cases that are quickly becoming the overwhelming consensus? The data says there is a cumulative excess of $15 trillion in personal savings when compared to the 12-month pre-covid personal saving average.

Chart shows annualized figures (x12). MS calculatec excess savings by taking the cumulative difference in personal saving from April to September compared to the 12-month average personal saving level from March 2019 to February.
Source: Opportunity Insights, Bureau of Economic Analysis, Bureau of Labor Statistics, Morgan Stanley Research

Household net worth has also recovered and the pandemic seems nothing more than a blip. What this means for you and your investing, where do you believe the majority of this savings glut will go once we are fully open? An economic bounceback is priced in at this point with markets at all-time highs. But there are still opportunities for unloved/underappreciated names as well as names that will over-deliver and the large cash pile Americans are sitting on will be the driver.

America’s Zombie Companies: Nearly 20% of America’s largest publicly-traded companies are considered zombies, meaning they aren’t earning enough to cover their interest expenses. According to a Bloomberg analysis: “Almost 200 corporations have joined the ranks of so-called zombie firms since the onset of the pandemic. Even more stark, they’ve added almost $1 trillion of debt to their balance sheets in the span, bringing total obligations to $1.36 trillion. That’s more than double the roughly $500 billion zombie companies owed at the peak of the financial crisis.” The worry is that zombies are less productive and spend less on employment, R&D, and building up their asset base.

Source: Financial Times

Two things here: First, this is primarily due to the Federal Reserve’s efforts to stave off a wave of bankruptcies by keeping credit markets open through their facilities and corporate bond buying programs. (Buying bonds increases their price and decreases their yield, allowing companies to raise debt at cheaper market interest rates) Second, we suspect that this analysis was done hastily as most consumer leisure/travel companies are still operating on mandated lockdowns, reduced capacity, and other restrictions so of course their earnings are hit. In fact many of the names mentioned in the article are just that – DAL, CCL. However, others such as M, BA, and XOM aren’t an apples to apples comparison. It’s important to distinguish between the walking wounded and the walking dead. However, the sheer amount of debt being raised is indeed unprecedented.

For all you gamblers: UVXY – the world’s largest volatility ETF, is seeing frenzied trading. Per Bloomberg, “Even as the ProShares Ultra VIX Short-Term Futures exchange-traded fund (UVXY) — which protects against swings in U.S. equities — slumps 34% in the election aftermath, it’s on pace for the biggest monthly inflow since July. The unlikely state of affairs may be explained by surging options activity and a rising number of shares out on loan in the $1.2 billion product. That points to investors betting against it on expectations the Cboe Volatility Index will keep falling into year-end.”

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UVXY was up 750% at one point. Now it’s down for the year.

According to IHS Markit data, the number of UVXY shares sold short rose to 1.3 million on Friday. The market thinks volatility will subside and are overwhelmingly shorting it. If you think otherwise and are right, this could be a big payout. Note: This is entirely gambling.

US auditors for Chinese companies: According to sources, Chinese companies with shares traded in America would be required to use auditors overseen by US regulators or face being kicked off exchanges. The proposal is likely to be issued for public comment in December.

Chinese companies currently do not open their books to American auditors. Hence, you have developments like Luckin Coffee to just name one. There’s credible allegations of fraud on a number of Chinese companies so this would be a step in the right direction.

Flagging Airline demand: Airline demand is seemingly flagging and the longer current conditions continue, the longer they are burning cash. However, they have massive cash piles, for example American has enough cash to last until 2024, United late-2022, and Delta until late-2023 according to our estimates.

Source: TSA data

However, these airlines and others have made up most of the their pandemic valuation losses. Using the Enterprise Value (value of whole company – the combination of equity and debt) from 12/31/2019 to the most recent data, the top 5 airlines have regained an average of 91.8% of their initial pre-pandemic value. Now, the stocks are much lower, but that is because of a combination of debt raised and equity dilution. We can confidently say bankruptcy is out of the question for large American airlines but do the current valuations make sense given demand backdrop? For what it’s worth, Bill Gates also says 50% of business demand is gone for good.

Our estimates and closing price as of 11/16

Tweets and Charts we like:

AirBnb seemingly has a more resilient business model than traditional hotels:

Wal-Mart’s long-term vision:

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Source: WMT Earnings Call

In response to our 60/40 portfolio commentary last week:

Perhaps if they were audited by American companies this wouldn’t have happened?

DoorDash Economics:

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Hope the Dasher makes more than one delivery an hour …

That’s your millennialmkts daily debrief, thanks for reading and good luck!

Posts are not investment advice or endorsements.