❌ Palantir SBC: $50 or Nothing
❌ Palantir SBC: $50 or Nothing
Massive Shift in Stock Based Compensation
Editor:Emanuele Marabella
Palantir’s dilution has been a major worry for investors since the DPO.
However, the company successfully reduced the impact of Stock-Based Compensation and its relative impact on Revenues.
We can now say that Palantir’s Stock-Based Compensation is “under control.”
Is it also aligned with shareholders?
In the latest Q1 10-Q, Palantir introduced a tiny, crucial detail that creates a massive shift in the compensation policy:
Palantir granted ~44mn Stock Appreciation Rights (SARs) to employees.
How does this work?
Palantir Bullets is free now, but if you wish to support my research, please consider upgrading to a premium membership with the link below:
$50 Target: Aligning Interests
SARs are a way to incentivize employees by giving them the right to receive (in cash) the difference between the stock price and the target if certain conditions are met.
The goal is to align employees with shareholders.
Details of the granted SARs:
$50 target;
5 years of continued service;
$20 max appreciation per SAR.
In simple terms, employees will be entitled, at the end of 5 consecutive years at the company, to receive the difference between the stock price and $50, but with a cap of $20 per SAR.
For instance, if in 2029 the stock will be:
$30 = SARs will be worth 0.
$50 = SARs will be worth 0.
$60 = each employee receives $10 per SAR.
$70 = each employee receives $20 per SAR.
$100 = each employee receives $20 per SAR.
For the stock to be more valuable, the business needs to be more valuable.
This way SARs are a way to incentivize employees by aligning them to the performance of the business and, consequently, the stock.
Differently from options execution, SARs do not involve:
issuance of new shares
cash-out from employees.
The company pays in cash employees using its cash reserves.
Differently from RSUs, which vest over time, if an employee leaves before 5 years his/her SARs will be voided.
SARs create an incentive to perform and retain talent.
Assuming that all employees received some SARs:
If the stock exceeds $70 in 2029 each employee will receive an avg. of ~$240k.
The total cash out for Palantir would be $880mn, which would be already easily payable given the ~$4bn Net Cash position.
SARs add to the regular shares employees vest during their time at the company in the form of Restricted Stock Units (RSU).
This is a massive shift in Stock-Based Compensation.
Currently:
74mn RSUs outstanding = future shares to be awarded
44mn SARs (all granted in Q1)
So we can have the intuition:
~1/3 of the SBC is now pegged to the success of AIP.
Seeking growth
No performance, no reward. What performance?
To reach $50 by 2029 from the current ~$20 per share, the stock needs to increase by 20% CAGR.
This would be ~2x the average return of the S&P500. However, at the $50 price, SARs became actionable but still not valuable.
To reach the maximum payout at $70 per share, the stock needs to increase by ~28% CAGR.
This brings us to a crucial question. How can the stock increase by 28% CAGR?
Assuming that the EV/Sales remains constant at 15x and a fixed ~4% dilution per year, Revenue needs to increase by 32% CAGR (28+4).
In other words, to receive the full benefit from SARs, employees need to deliver growth above 30%, considerably more than the 21% as of last quarter.
As a shareholder, I am excited to see the introduction of SARs to align interests while stimulating talent retention.
Will Palantir employees succeed in achieving the $50 target?
If this article helped you better understand Palantir’s Stock-Based Compensation please hit the ❤️ button and consider supporting my research with a paid subscription.
Yours,
Arny
Reach me:
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.
It’s a great solution. Revenue from exercised stock options was $83,000,000 last year. That’s more than enough to pay off the ‘first’ SAR’s. Further, cash reserves significantly increase every month. In five years, that $4 Billion should grow to several times the current balance. For your common, everyday, low level employee to get a $240,000 bonus is just extraordinary and not matched by any other corporation. This will enable PLTR to attract the very best talent making the company a true meritocracy. Slackers need not apply.