⚰️ Let's Bury Burry

"Palantir will collapse in two years"

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Editor: Emanuele Marabella

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Legendary investor Michael Burry just dropped a new interview with a legendary level of bullshit.

Let’s bury him.

1.⁠ ⁠”It’s the AI consulting thing.”

Burry can’t understand that a consulting business doesn’t have an 80% gross margin at ~50% FCF margin, growing at +60% while maintaining a fixed headcount.

Legendarily embarrassing.

2.⁠ ⁠”Palantir doesn’t produce a product for AI. It was a lucky AI cover.”

Seems Burry spent more time writing tweets on Palantir than actually studying it.

Palantir was doing AI before it was called “AI”. The proof is in the old demos and the fact that it was perfectly positioned as the “AI grid” application for deploying n-models to deliver business value.

If Palantir’s AI wasn’t real:

• its business would have stalled like C3.ai;

• its metrics would not have exploded;

• all the clients presenting at AIPCon are liars;

• ⁠USA Government is deploying a massive scam at scale.

3.⁠ ⁠”SBC wastes all the income.”

SBC is expensed as a cost in the Income Statement, but doesn’t generate a cash outflow from the company.

Palantir GAAP metrics, AFTER the SBC impact:

• 33% Operating Profit Margin;

• 40% Net Income Margin (thanks to Net Interest).

= even if Palantir paid all the SBC in cash, it would still have elite margins.

4.⁠ ⁠”Wall Street takes EPS per share and adds back SBC.”

EBIT Adj is the best metric to assess the strength of the business because it’s a proxy of the operating FCF.

EBIT Adj. = GAAP EBIT + SBC

NB: since the timing of customers’ invoices can vary, EBIT adj. is a smoother and more representative measure of the value generated in the quarter.

5.⁠ ⁠”GAAP understates the real cost of SBC.”

For each employee, SBC expenses from RSUs are recorded at the grant-date price of the shares and remain constant over the vesting period, which is ~4 years.

This means that if Palantir stock rises, the company will continue to record the initial related SBC cost for the vesting period. Still, the shares provided to the employee at the end of the 4 years are actually more valuable than the expenses recorded.

GAAP indeed understates the effective $ amount employees can receive once the shares vest, if the stock rises significantly after the grant date.

That’s the bet employees take. That’s the bet investors take.

SBC negatively affects shareholders as their % ownership of the company is reduced due to the issuance of additional shares, but the accounting value matters relatively little.

What truly matters to shareholders is the change in the number of shares (=dilution), which affects the per-share results and is a serious problem if the company doesn’t grow.

Palantir:

• +60% YoY Revenue;

• +90% YoY EBIT adj;

• +200% YoY EPS;

• +4.6% Diluted Num. of shares.

As long as the business grows much more than the dilution, there is no issue.

I am a happy diluted shareholder.

6.⁠ ⁠”Look how much the company pays in buyback to offset that level dilution.”

Buybacks are stupid only if done at a stupid price.

Since Palantir began its buyback, the stock has risen more than 6x.

NB: in Q3 Palantir bought back $20mn vs $600mn EBIT adj.

7.⁠ ⁠“Billionaires/Revenue ratio bigger than 1 has never been seen.”

Palantir has 5 billionaires owning the stock compared to $4 billion in Revenue generated.

While surely that’s an anomaly, it doesn’t mean anything.

To get to $1 billion, you need to build a business for 20 years, not rolling the portfolio every quarter or selling a newsletter.

Shyam Sankar, Palantir’s CTO, for instance, has helped build the company's value as the #13 employee since 2006.

Meanwhile, Burry called 20 of the past 2 recessions.

That’s unprecedented.

In 5 minutes, Burry dropped 7 bad takes.

That’s unprecedented.

Last week, I was told that Burry has literally coordinated a short attack involving institutional players in the trade.

While I can’t verify the accuracy of this claim, I can verify that Burry looks more desperate than ever to preserve the little reputation left.

Yours,
Arny

Reach me:

• X @arny_trezzi

• LinkedIn: Arnaldo Trezzi

Disclaimer: The views and opinions expressed above are current as of the date of this document and are subject to change without notice. Materials referenced above will be provided for educational purposes only. None of the above will include investment advice, a recommendation or an offer to sell, or a solicitation of an offer to buy, any securities or investment products.