David Trainer of New Constructs says Palantir's earnings beat doesn't matter because the stock price already assumes 100% annual revenue growth for five years. The company's defense business is solid, but commercial growth faces margin pressure and competition that could make those expectations impossible to hit.
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Shares of Palantir were down 2.7% during after-hours trade. Well, we can get more from David Trainer, founder and CEO of the independent research technology firm New Constructs. David, good to get your thoughts on this today. What stood out to you then from these impressive numbers from Palantir?
They're just not good enough. When you look at the stock price, you realize that, you know, as good as those numbers are, the current price implies that the company is going to do 100% compounded annual growth in revenue for 5 years. Or if you wanted to cut it another way, 55% compounded annually for 10 years. That's what you call price for perfection. And what we saw today was close to perfection, but not quite there. The real issue is, can they keep that super performance up for 5 to 10 years? And I don't think the market's going to buy that.
Yeah, you have very high expectations, David, for Palantir, I've got to say. How much of that is driven by Modern Warfare driving Palantir's growth then?
Absolutely. The economics of this business are great. And Steve, these are not my expectations. These are the market's expectations. When you use what we call reverse discounted cash flow model, which doesn't try to predict the future, but quantifies the prediction baked into the stock price, that's when you see these outrageous expectations for future profits as reflected in the current price. That's why the stock dropped even though they did so well, because the stock price implies they're going to do even better than these already great numbers.
Okay, understood. And when it comes to just to get your take then on its commercial business, then away from the sort of defense side of it, how do you see growth there?
I think the growth's gonna continue to be great. The question is, can it be 100% compounded annually for the next 5 years or 55% compounded annually for the next 10 years, which is what's baked into the stock price? And I don't know it can do that well. Look, it's a great business in a great space at a great time. A lot of growth there. The other thing I didn't mention was that those super high growth rates that are baked into the stock price also assume that margins stay the same. So again, really high expectations. But Steve, it's a— don't get me wrong, I'm not saying it's a bad business. It's a great company. It's just not maybe a great stock when the valuation is already this high.
Okay. In the short term though, at least, it has raised its forecast for the next quarter. Do you see that on track?
Yeah, I think that was a little— even a little bit better than what was expected. But it's still not as high as what the stock price is expecting, which is why we're seeing the stock drop. When you have stocks like this with such high expectations, just the downside outweighs the upside in a big way.
And how do you see Palantir then, sort of how it stacks up against the competition in this space, which is getting ever more crowded?
Well, that's why I came back and said our model assumes the margins stay the same, and they still have to do this 100% for 5 years or 55% for 10 years. And I think, Steve, great point. Naturally, margins are likely to come down because the space is getting so competitive. Now, Palantir has a great advantage because they've been doing this for a while. And most importantly, they've got the deeper relationships with the clients and they've collected the data that makes it very sticky and makes switching costs very high for a company to move from Palantir to someone else. They've also been building expertise and business practices and agents around that with these companies, which is a huge advantage for Palantir. And will drive more growth. But will the marginal new projects have the same margins as existing projects? Probably not, which means you're going to see lower revenue growth and lower margins than what the stock price already implies, which means quite a lot of downside for the stock.
All right, good to know. Thanks very much for helping us understand that better, David. David Trainer, founder and CEO of the independent research technology firm New Constructs.
