PLTR Dilution Tracker [Q3]

The SBC path towards "normalization"

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Stock-Based-Compensation (“SBC”) is often the key argument raised by PLTR 0.00%↑ opponents.

Here we assess the quarterly advancements towards the "dilution normalization” (Palantir Dilution Tracker [Q2]). Please refer to the previous articles to see:

• how it works (When Will PLTR SBC Ease?);

• how we should incorporate it into our models (Why 99% of PLTR DCFs Fail).

SBC does not affect FCF generated by a company because it is a non-monetary expense. However, it does affect investors.

Palantir relies heavily on SBC to compensate its employees. Therefore, it is crucial for us, as investors, to track the progress towards “normalization.”

Q3 Dilution Tracker

In absolute terms, SBC has steadily decreased and reached a relative minimum of $140mn.

This happened despite hiring aggressively as Palantir is hunting for talents while most tech companies, even the Big Techs, are laying off massively (PLTR Hunting Season is Open). As @Timothy38296021 pointed out, SBC is driven by executive incentive plans.

As a reminder:

SBC is fixed at the grant date. Therefore a declining stock price does not affect the vesting SBC.

Arny Trezzi 🐬 @arny_trezzi

$PLTR is LAYING OFF. Oh, wait 😳

SBC as a percentage of Revenues is decreasing steadily and reached 29% as of Q3.

This percentage should decrease further and help attain GAAP profitability as Palantir scales.

In order to reach GAAP profitability, Revenue must keep growing while SBC stabilizes or keeps decreasing.

Previously, I underlined that under conservative dilution assumptions Palantir should be profitable by 2024-25 (When Will PLTR SBC Ease?). This is in line with Karp’s statement:

“That combination of radical optionality on expenses and what we perceive to be macro conditions converging with product conditions allow us to kind of see what we think will be a profitable company in 2025.” - Alex Karp

I will upload the Palantir vs Peers SBC chart when all companies will report their Q3 results.

How SBC Impacts Investors

As investors, our major concern should not be in the amount of SBC but in the net effect of the change in the number of shares.

Let’s assume a company grows 30%, like Palantir. The Growth per Share, or “Diluted Growth” for shareholders would be:

• 30% with no change in the number of shares;

• ~20% if the number of shares increases by 10%;

• 0% if the number of shares increases by 30%.

Value for shareholders is only created if the rate of business growth is greater than the rate at which it is being diluting.

Palantir’s dilutive effect from the increase in share count is decreasing. However, this is partly due to the decrease in stock price, which makes some options non-exercisable, therefore, decreasing the diluted number of shares. I will go deeper into this in a future article.

A wider divergence between the business growth and the dilution creates a greater benefit to investors.

This is why it is crucial for Revenues to accelerate (PLTR is Planting The Seeds for Exponential Growth) and the number of shares to “normalise” towards 3-5% at most.

You could find my DCF that incorporates the dilutive effects in the previous article (PLTR Reverse DCF: what does the current price imply?).

Incoming SBC

Unrecognized SBC is the amount of SBC that is yet to be recognized from the current SBC plans, which include Restricted-Stock-Units (“RSU”) and Options, as employees perform their job during the vesting period. Therefore, Unrecognized SBC hints at the direction of future SBC.

As of Q3, Palantir’s Unrecognized SBC decreased steadily, well below its peak of 20Q3.

Palantir currently has ~$1,5bn Unrecognized SBC. This is composed of $779mn RSU, with an avg. vesting period of 3 years and $760mn Options with an avg. vesting period of 8 years. Therefore, we could expect RSU recognition to generate ~$66mn SBC per quarter (799/12), and Options recognition to generate ~$24mn SBC per quarter (760/32).

As a result, we should expect at least ~$90mn SBC per quarter from the recognition of Unrecognized SBC.

I say “at least” because, as we go through the year, new grants will occur, both from existing employees and new employees, since Palantir is hiring aggressively (PLTR Hunting Season is Open).

Conclusion

Despite the fact that SBC doesn’t impact FCF, the derived dilutive effect is a real headwind for investors.

Therefore, as investors, our duties are:

• consider SBC when we perform valuations (Why 99% of PLTR’s DCF Fail);

• verify that the growth keeps outpacing dilution;

• track the rate of SBC as it heads towards “normalization” so that GAAP profitability can be achieved.

I aim to update these charts after the Q4 release.

Yours,
Arny

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View expresses are my own and do not represent Financial Advice in any way.
I own (many) PLTR 0.00%↑ stocks.