Chit Chat Stocks - Palantir (PLTR) | Deep Dive

Episode Date: February 25, 2021

Palantir Technologies is a software company that specializes in large data analytics. Palantir offers customizable data solutions that allow companies with large data collections to find trends and discover new patterns that may not have been found otherwise. Brett, Ryan, and Ian dive into what the company does and how it may perform over time. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:03) Industry | (8:08) Management & Ownership | (10:18) Valuation | (14:34) Earnings | (15:45) Balance Sheet | (18:15) Our Analysis | (21:51) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. This is the Thursday deep dive on Chit Chat and Money. My name is Brett Schaefer and I'm here with Ryan. As always, you probably know him, but we have Ian on. Again,

Ian, how are you doing? You got your project going, you're out in Flagstaff. How's life? life is going pretty well it's uh went down a couple of blue runs the other day on the ski hill and uh you know starting to figure it out a little bit having some fun doing some investing in the market it's been a crazy week this week but um life is good so i saw you added to mohawk a little bit what was it down like 15 this morning 10 something like that yeah about 10 12 somewhere in there yeah so you know got to buy those deals when you get them always buy the dip it worked out this time for sure yeah the uh all right we're talking palantir today but first up we've got to talk about our partners at seven investing uh and if you use the code ccm at

checkout you can get ten dollars off your first month ryan do you want to talk about any uh highlights of what you like about the team at seven investing well uh only a few more days until the new picks correct but uh highlights i don't know the it feels like you're actually a part of the team i guess i want to give some sentimental pitch but i mean it's well worth the money you're only paying seven bucks and you really get to know pretty much all seven advisors so there's our sales pitch but i'm going to get into what palantir does um and they are really secretive and it's really hard to understand it took me forever but i'm going to try to describe it and Ian or Brett, you guys can sort of revise my description if you want to, but it starts with

data integration. So once Palantir software is made accessible to a customer, which tends to take sometimes days or weeks to integrate, and also onboard, the customer can then input all its data into the Palantir software. So it could be spreadsheets, it could be GPS coordinates, It could be satellite imagery, any sort of raw, structured, unstructured data they can basically throw into Palantir's software. And then the second step is what they call search and discovery. And so this is where the customer chooses what it wants to identify and can actually search it from a single search bar. So Palantir is able to identify outliers, patterns, pieces of data that customers are looking for. And it's not just they don't even really have to know what they're looking for.

The example that Palantir used was a customer could ask if it's like a government or a local government or something, they could say, show me a heat map of all the crimes that took place in my district over the last six months. And Palantir was able to query that and find it. It's supposed to do it like just really easy, like a snap of a finger. Yeah. And then the third step is what they have called knowledge management. That's kind of what terminology Palantir uses. And so this goes beyond simply the search and discovery, and it provides basically context around the data. So where the data came from, when was the data found, who else is allowed to see it?

So it's basically given all that sort of background data along with it. And then that helps the analysts sort of make judgments because that context around the data can be really helpful. And then the fourth part is collaboration. So this allows the individuals to work together and share their analyses of what Palantir provides them. So they said this part was a little harder than what they anticipated. And the problem is you don't want everyone coming to the same conclusion. You want people working independently and sort of analyzing the data on their own, but being able to share that in a similar format. And so that's what they've kind of built.

And every individual has their own interpretation of the data set, and then they can kind of compare it. But I really recommend going and watching a demo. They have it on YouTube. It's really impressive, and we'll talk more about that later, but I'll get into the history. So Palantir was originally founded by five different people in 2003, Peter Thiel, Nathan Gettings, Joe Lonsdale, Stephen Cohen, and Alex Karp. Alex Karp is that evil-looking guy. You're probably familiar with the picture if you've ever looked at Palantir.

And he's the CEO currently. He is the CEO. And then it was actually built originally to help counterterrorism operations, and the name is based on the Lord of the Rings' seeing stone known as Palantiri. Am I saying that right? yeah it's like with the one that sourmon has yeah you like touch it and then you can see well you can communicate and you can see into the future it's basically i mean palantir is the same thing and when you say steven cohen i think you mean stephen cohen because steve cohen would be

that yeah sorry that's not him but i think two of the founders of palantir were also founders of paypal yeah am i am i getting that right because i know peter teal was a part of that was alex carp not sure i'm not sure who the other one was ian you know i don't think it was alex carp i can't remember which of the other three it was but okay but the uh so the first platform they released was called gotham in 2008 and gotham is meant for governments or intelligence sources and is used to identify potential threats or help protect soldiers from potential explosives that kind of thing but then they also released foundry which is their business facing software in 2016 and Palantir states that Foundry is becoming the central operating system, not just for individual

businesses, but industries as a whole. And so really, this is a place where you're searching for specific data points, outliers, whether it's the government, whether it's Gotham, that software or the Foundry software, it's basically sort of on this, the foundation is similar. And then Palantir was started in Silicon Valley, but they moved to Denver, Colorado and made sure to insult silicon valley peers in their s1 so i've got some quotes here this was from i believe the ceo wrote this himself he said the engineering elite of silicon valley may know more than most about building software but they do not know more about how society should be organized or what justice requires he also said our company was founded in silicon valley but we seem to

share fewer and fewer of the technology sector's values and commitments so you yeah they are not fans of silicon valley he doesn't mince words and it's kind of strange because he's a he's a i don't know kind of built that some of it some of the stigma or some of i mean not even the stigma he built a lot of what silicon valley is known for yeah i don't think peter wrote this but it does feel strange because they're all super rich guys from silicon valley aren't they he also i don't want to uh hopefully i'm not stealing anything uh yeah i'm not but he also said uh wealth is corrosive like he hates it and i'm like you guys are all worth a billion dollars yeah like it's so easy to say that when you're that wealthy but all right anyway the uh yeah before moving on to my

topic i'll say the conference calls and the s1 are interesting to say the least uh i i was not bored from the management commentary it feels like they're lecturing us on how to run our lives but i'll get into the industry and landscape real quick i've got i did some quick research and it was nathan gettings was the other uh person from paypal he wasn't really part of the paypal mafia but he was an engineer at paypal um and then kind of went over to palantir uh peter teal kind of convinced him to start it yeah because i believe they sold paypal in 2002 they probably used that windfall to start start right start this all right i'll get into industry unique industry as ryan describes it's really hard to pin down the market opportunity they're kind of building out their own

for this software that's going to the government and commercial enterprises but it is only for enterprises like large large ones at least right now and one of their points that i think ryan didn't hit is that they make a lot of this customizable so since the contracts are so large It could be upwards of $10 million for a company, maybe like $3 million. They make it so the software is built for that company, and then that gets it more embedded into the service. But I'll talk about the industry and get back to that. In the S1, they claim to have $119 billion total addressable market.

Half of it is around commercial at the 6K largest or 6,000 largest organizations around the world. And then half of it is government spending, assuming most of that is the US government and state governments in the United States. because they do say that they only offer their products to U.S. government agencies and their allies. Just kind of an interesting point. They only do that. I don't know how they define that, but whatever they do.

They probably ask the U.S. government. They say, can we do this country, and they approve it. Yeah, so that's kind of some of the controversy from having such a close relationship with the government, but it's whatever. in the S1. They claim, again, that in 2020, there were 50,000 custom software projects at large organizations, and only 23% were completed on time and on budget. So that's one of the things that I think they can improve with if they bring the Palantir software to these businesses. The only question you really have to ask is, is anyone else going

after this opportunity? Maybe. It seems like it's something that's fairly unique, but it's such a large market that you could see other companies trying to do it and then it's also at you have to also ask are these companies going to all want to pay palantir tens of millions of dollars um if so that's a good opportunity so far they have yeah um right now they estimate they have about three percent of the market share uh so they claim that they have a long runway of growth ahead of them um sounds reasonable um but yeah kick it over to ian if you want to talk about management yep so like uh ryan mentioned peter teal was one of the co-founders he's still the chairman um for people i think most people are familiar with peter teal but for people who aren't

he was a he's a silicon valley figure definitely he was um a founder and ceo at paypal before it sold to ebay um he was an early investor in facebook he wrote a book called zero to one that's been a bestseller. It's a very interesting book. Go ahead. Oh, good book. Yeah. And that really, I think there's a lot of people out there who want to say they're a contrarian and that that's kind of the trendy thing to do. He, at least from what I've watched of him, I think that he is a true contrarian. He thinks differently than most people. And it's interesting because I think a lot of his ideas in Zero to One, a lot of those were kind of contrarian ideas and have now become more mainstream because of him and i think that's i think he's done that with a number

of things um he owns about seven percent of the common shares outstanding he's the largest uh individual shareholder the he has a fund that he started called founders fund which is a famous fund that owns another six percent of palantir so quite a bit of um peter seal is definitely involved in this company uh the ceo and another co-founder is alex carp uh he really tells the story that the company was born out of a desire to take down Osama bin Laden and a response to 9-11 that was kind of you know we should be able to use data we should be able to figure out these problems to um take people down and and since then government uh you know people in the military have basically said yeah if we would have had stuff like this we may have been able to present

some of these tragedies um so it seems like he's built that company to some extent uh one interesting thing is in his professional bio uh oftentimes they'll just say like your board affiliations and what you're doing and his kind of we've been talking about how it's a little bit of an eccentric team in the middle of his bio it says he is a practitioner of chin style tai chi and is an avid cross-country skier so just a little bit interesting that that's in the middle of his professional bio but i think it kind of says a little bit about the type of people that yeah i'll also volunteer i also yeah i also saw that he typically works out of a barn in new hampshire interesting that's i mean they're just they're a little different which is not necessarily

a problem and there's nothing wrong with tai chi and nothing wrong with uh cross-country skiing it's just kind of interesting to see i look at a lot of these professional bios and that kind of struck me as different than stuff that i generally see in there yeah it makes the company more fun to follow for sure yeah yeah entertaining figures definitely um he owns a little over one percent of the shares uh in total there's about 10 insider ownership about 17 if you include the founders fund and only 20 institutional holdings which isn't entirely surprising given it's a fairly recent ipo but if it's on the market for a bit and kind of proves itself i think that institutional holding number will go up, which should provide a little bit of a tailwind to the stock price

as more institutions try and gain some positions in it. Yeah. And then you also got to worry about the lockup period too, because that can have an effect. And I assume that that's part of the reason that the institutional holdings are low right now is that many of those institutions like to wait until some of these lockup periods expire. Sometimes they even have it written into some of their investing guidelines that they have to wait until lockup periods expire to, uh, to purchase shares. So anyways, okay. I'm going to keep an eye on. Yeah. I mean the lockup period, especially when Peter Thiel owns 6% or what was it? Yeah. A 6%, no 7% outright. And then his fund owns 6%. If he decided to, uh, liquidate or return his

capital to LPs from the fund, like that's a large chunk of stock. So, and they're going to, because that's the whole, that's kind of the, you know. I don't know if he'll release his own shares though. No, maybe not his own shares, but with the founders fund, I mean, you got to expect that because you're, I mean, it's pretty late for returning that capital to their LPs. Okay. Valuation? Yeah, I'll hit that.

Enterprise value is $49 billion, ticker is PLTR. EV to sales as well today. We've seen a lot of crazy changes in stock prices, so this might be a little different, But EBITDA sales trailing is 44.8, EBITDA gross profit 66. So not cheap at all. Yeah, it might come down somewhat just because their sales are so lumpy and so deal-driven. But they have slow growth and they'll have really accelerated revenue growth.

You really have to look at the long-term period of their deal-making and all the contracts they're signing. And then the last thing I have here, and they're not profitable, not cash flow positive. They had a lot of stock-based compensation, but that was incurred at the IPO, which is weighing down the operating losses. Those shouldn't happen each year. I mean, you'd hope that, I think it was like 30% of the revenue was stock-based compensation for whatever the trailing, maybe a few quarters. A little higher. It's a little high, and you would not expect that to happen in a year where they don't IPO. Or they direct listed, but whatever.

Yeah. I'll dive into the earnings. So their full year 2020 revenue was 1.1 billion. That was up 47% year over year. That was a pretty meaningful acceleration from 2019. So in 2019, the revenue growth was about 25% year over year. So like I said, it's pretty lumpy. It's really based on these big contracts. And then the average revenue from Palantir's top 20 customers was $33.2 million. So these contracts are huge. And they didn't give an exact customer count this year, but in their IPO, they said they have about 125 corporate and government customers. So top 20 are paying more than $33 million, and that's growing 34% year over year. So they're spending more with them, with their existing customers. And the gross margin in Q4 was 78%. Their operating loss for the year was $1.2 billion. But operating margin came down to about negative 49% in Q4.

So it wasn't as bad. And like you mentioned earlier, a lot of that was from the stock-based compensation related to the IPO. They spent more than 100% of revenue on stock-based compensation in 2020, all from the IPO pretty much. although um even without that i'm pretty sure in q4 uh 75 of revenue was still spent on stock-based compensation in the fourth quarter but that still might be tied to the ipo yeah it might be worth looking into and then the operating cash flow was negative 300 million for the year their adjusted operating margin so if you added back all that sbc you extracted that out was 32 percent um and probably not fair though it's gonna they're gonna have some yeah no absolutely and then uh another

note that i thought was interesting they have 2400 employees uh sometimes it's just interesting to get a grasp on how big the company actually is because especially with palantir who's so secretive um it's just i don't know it's nice to uh it's nice to see that it's a bigger company i was listening to one of the employees too like he said when he had to describe to friends what palantir does, who was like, not really supposed to say and everyone's like, well, it's just data visualization. It's like, yeah, sure. Yeah. All right. I think that's pretty much everything I have for the earnings. And you want to hit balance sheet? Yeah, let's take a quick look at the balance sheet. So they've got about $2 billion in cash as of the end of the year, about $450

million in debt and leases, I think about 200 million of that is true debt. And that's looks to be from a couple of revolvers which with about three percent interest rates ish they're based on um the libel rate so it's you know varies a little bit but about three percent um so not super expensive debt and not too much debt you know it's a 1.5 billion dollar net cash position so plenty of cash um one thing to keep an eye on with a company like this as with all sass companies is their deferred revenue and then also their day sales outstanding just to see you want to take a look, make sure their deferred revenue, like if it's growing at the pace of revenue growth, that's not super alarming. But with these large contracts, it's kind of nice to know

how much of it's coming now versus how much of it's going to be coming later. And then with day sales outstanding, that basically is the time that it takes for them to collect money once they perform their service, how long it takes once they bill someone, how long takes them to get their money back basically. And that rose from like 18 days to like 34, 35 days from 2019 to 2020. I assume because 18 days is outstanding for SaaS companies. That's one of the lowest numbers I've seen. Generally, it's closer to 30, 35, 40 days, somewhere in there. But one interesting thing, and I'd have to dive deeper into this, but I suspect that part of that is due to these government contracts and that government contracts uh the government

agencies actually care less about cash conversion and so as they wait more heavily towards um these commercial accounts that uh that day's sales outstanding will continue to rise so that wasn't super alarming to me that that jumped so much but um something to maybe keep an eye on a little bit over the next couple of quarters just to see where that normalizes because that'll dictate how much cash they have to keep tied up basically in operations versus how much they can invest in new products and things of that nature

they did mention that they tend to integrate the software faster than most software companies they said it's more like days or weeks whereas some companies usually takes months they do like to compare themselves to other software companies

they do try to make themselves sound special but that's weird do they have the revolvers they've taken out the money on the revolvers or is it just they yes they at least the last it's a little bit because they've just released a press release with the 2020 full year numbers um so we don't get the whole annual report yet but it looks like uh from what i can tell that they have at least the last reported that they did have money out on the revolvers huh because that's interesting i don't know why they would have it out with they seem to have plenty of cash yeah and so i don't know if they

just say it's cheap cash or i'm not sure it was a little bit surprising to me as well yeah that is something to track also worth noting uh you mentioned the deferred revenue i'm pretty sure i saw that the average uh contract lifetime is three and a half years so these are long contracts uh it sounds like their customers know it sounds like the customers really rely on the palantir software and i don't think palantir is lying when they say it becomes the operating system for these businesses. Yeah, I mean, I saw them sign a nine-figure deal with BP.

They had a nine-figure deal with the U.S. government, I mean, across different agencies. And the only other company I've seen sign nine-figure deals would be Autodesk. So, you know, it's pretty impressive that contract size.

But let's take a quick break. Those are huge deals. Yes, let's take a quick break then. We'll hit the second half of the show. Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices.

You'll get real-time alerts. oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply welcome back next up is competitive advantages for Palantirs? We'll throw it over to Ian first. What do you have? Yep. So I want to talk about scale. I think that's one of their major competitive advantages is like you're saying, they're closing nine-figure deals. There aren't very many

companies that can just start up and start executing on nine-figure deals. So the more customers they get, the more credibility they'll get. This is something that people care a lot about credibility. So, you know, I think the scale is really going to give them a first mover advantage here and be a big, just a big advantage as they move forward. Yeah, because you can't really have a 10 person developer team make $100 million software, whatever, or a platform, a custom platform, excuse me, that's worth like $100 million to a company like BP. That takes probably, you know, a good chunk of those employees that got there. Right. And like the, you know, sometimes we look at some of these industrial companies and say look at all these assets they

have on the balance sheet and that provides a little bit of a competitive advantage because the capital needed to get going this they don't have the same hard assets on the balance sheet but like you said all the human capital and also the years of developing the software and the relationships they've built becomes a pretty big um it's a huge investment for anybody trying to take them on yeah yeah and if if you're worried about like management overselling how important their platform is there's no better vote of confidence than someone paying a hundred million dollars to use it yeah they do like the hybrid software but it sounds like it's pretty legit yeah and then okay i'll get to mine so network effects um basically every piece of data that's

being put in is one more reason to stay on palantir like uh if you've been using palantir for three years and you've had all your data inputted for all that time, it's going to be impossible to switch away. And it also becomes more effective the more data it receives. So it can have more information on people that you're looking for, for areas, the more time that you've been using it. So there's that kind of network effect internally within the company. If someone in a department that you never talked to put in data that's relevant to you, it helps you and you like, you end up using the software more. So there's sort of that network effect and it just leads to higher switching costs for the firms. And you can see as a whole, this kind of gets

a little bit into the, you know, the fairy dust AI stuff, but as they get more data onto, you know, within the company, theoretically that drives their machine learning platforms to do better. Now, how much of it is going to be realistically helping their customers? We'll see. But if anyone's going to have an advantage it will be palantir um but yeah hit mine i said privacy stuff so they talk about on the s1 where they claim they have won the trust of institutions which i think they mainly mean the governments uh and there's a reason why they're choosing them for the software instead of other people it gives them an advantage especially with the customizable nature to make certain things private versus others and it helps when they're trying to win customers and they're

saying like look the u.s government uses us they need privacy um you're going to not get better privacy with something somewhere else you know yeah what about uh future growth opportunities yeah yeah so the one i identified is average revenue per customer they said that it was up 41 last year which is a massive number um and then even among their top 20 customers it was up 34 so even companies that were already companies or government that was already uh spending, you know, the most money with them, they were still up 34%. So I think that's going to continue, they're going to continue to have growth opportunities there through additional products, smarter AI, you know, once they have this data, there's all sorts of, you know,

I'm sure they're talking with their customers every day and figuring out, you know, what tools they because they can build the tool. Now the companies just come to them and say, Hey, what would be really nice is if we could be able to do this with the data. And six months later, Palantir comes back and says, hey, you can do that now, but let's add this to your contract. And so I think average revenue per customer is going to be a big driver for the next few years. Yeah. And then with the average revenue per customer being so high, it gives them the ability to spend more on that customer, which for a company that's selling software for 30 bucks a month to their clients, it's not really going to work. But someone like Palantir could potentially

make a profit. But I'll throw it over to Ryan. What's your future growth up? Uh, so I don't know enough about the tech to give any sort of growth opportunity that way. But it seems like a little bit of a more intuitive user interface would be good for them. And the thing is, the tech itself is really, really impressive. But when you looked at the demo, the user interface looks like it's from like 2008. um and i know it doesn't seem like it would matter that much but they spend a lot of i'm sure they spend a lot of money uh and time onboarding clients and getting them acclimated to the software so if they can make that a little more intuitive make it easier for non-experts to navigate through that uh they're going to be able to decrease those costs hopefully over time yeah that makes sense yeah it might be a small part but it's like it still matters it can help save people time yeah it looked like extra extra difficult kind of like even worse than someone

like alter x it was similar to alter x similar to that yeah i mean that one looks that one looks pretty bad um but the thing is the back end is maybe the most impressive software anywhere and then they just they're like yeah who cares what people see the front end front end ui engineers for sure but i'll hit my future growth opportunities i think industrial companies could have, you know, they have a lot of potential to work with them. They highlight in their S1 that there was an engineers at a raw material company that increased their output by $2 billion by using their software. So showing this to other, you know, Fortune 2000 industrial firms, that could really help balance your gains in more companies. It feels similar to someone like Autodesk, which

I already mentioned already, where it's like upfront managers, people that are, you know, allocating the client uh the spend or saying you know do i really need to spend a million dollars a year on the software but then it ends up saving them five million dollars and they're like you know all right well it's definitely worth it yeah yeah i i agree and i think they just signed a big deal with trip uh 3m today yeah they expanded their contract yep and ferrari too so i know that's oh wow they did mention i'm ultra bullish ferrari but let's hit highlights and low lights in what do you have yep so for my highlights like i mentioned i think the revenue per user improvements are really impressive and just shows the strength of their platform uh strong revenue

growth and the right connections i think this having peter teal connected is a big deal um that gets you and that gets your foot in the door in a lot of companies in a lot of places so i think that's big for especially a company like this that's trying to close these huge, you know, like you said, nine figure deals. So that's a big, big deal. For low lights. I think Ryan, you gave a great explanation. I, and helped me a lot. And I think really did a good job for all the listeners too. It's still a little hard for me to understand exactly what they do in all of these situations. Like I wish there was a little more information out there about how customers use this exactly. And especially for the government business,

which seems to be such a big part of it. It would be nice to know exactly what's going on. And they seem to like it like that, not super transparent. And just, you know, they talked for quite a while about, you know, I think I found articles all the way back in 2013 when people were speculating they might go public saying, oh, yeah, we don't really want to go public because then we have to be more transparent and all this type of stuff. And they've kind of figured out a way to give a little more transparency

but still um not be super transparent and and maybe that's going to lead to you know over these next few years i think they're probably in a better position now in 2021 than they were in 2013 in terms of having such a competitive advantage that they may be willing to be a little more transparent with investors going forward but we'll see about that um i also i i think that the platform is interesting i also i'm not sure about some of the um ethical considerations they seem to be doing the right thing but there are a lot of questions about that and i just don't understand it quite well enough to get a good feel for that yeah there are some outside parties that could affect them i mean the relationship with the government you know local authorities could

really right hamper some of the stuff um and that's not something the company can control yeah that's it and the last thing i'll mention oh go ahead sorry i was gonna say we talked about the lack of transparency but part of that might be because they have to be secretive the government might not want details of their contracts out yeah that's that's a fair point um the last thing i want to mention and you talked touched on it a little earlier but this this adjusted operating margin they're guiding for an adjusted operating margin of 23 percent in q1 um the big adjustment they make is stock-based compensation it looks like they expect that to still be fairly high and i'm not sure i love the idea that we're adjusting our operating margin based on stock

based conversation because it seems like you're gonna have to be paying those people one way or another if you're paying them in stock and you actually believe the stock is undervalued right now which i assume they probably do um it may be even more expensive than cash to be paying them in stock and so the idea of kind of adding that back to get this weird adjusted margin um you know it's not like it shows they're improving their margins a little bit but i'm still i don't love when i see adjusted margins like that that don't really make sense to me yeah i worry you know i don't worry about their gross margins gross margins look great but i do worry about management's lack of discipline in the operating expense line that would be a big concern for me

yeah they do it doesn't seem like they're running a super tight ship with all the operating expenses uh no that could change that they could change but as a shareholder uh one you don't want your shares diluted and two you need to get profits at some point so yeah i don't know ryan what do you got yeah i'm not sure that i'll ever i assume they're being sort of aggressive with it because they know how much they can generate in the future in terms of revenue but to ian's point yeah there is like a little part of me that doesn't quite understand the product in its entirety so some of these are custom but i'm curious how many they can build and then just redeploy and make a few adjustments right if it's like in the same industry or do they have to

build different custom software because i assume being able to sort of redeploy it with a few adjustments is more profitable than having to start from the ground up with another custom uh software solution but um well they did mention on the conference call they are doing more it was a little strange because i felt like they were contradicting themselves because in the s1 they talked about how an advantage they had was customization right but then on the conference call the last conference call they talked about how they were doing more cookie cutter things like you just mentioned to improve profitability so i thought that was a little bit of a contradiction yeah yeah so i guess that uh that part that i don't quite understand that might be a bit of

a red flag for me but then the other low light is that management uh i've i don't know why i have this but i'm typically anti-silicon valley i guess so are they but it feels like they talk to people like they're beneath them like this guy just rambled on the conference call without even talking about the business at all he was just saying like he was talking about how he views the world and his personal takeaways from covet i'm like you're talking about clandon test clandon clandestine you know you know i'm trying to say he was talking about clandestine returns i don't know what that means at all i don't it so i guess me yeah that was a red flag for me but then my highlights are that uh i watched the demo on youtube and it seems like maybe the most

revolutionary technology uh i've ever sort of watched a demo careful new paradigm are you saying it's a new paradigm no i'm not i'm not big with tech but this seems like a database that could literally run the world like i was watching this like they had history on everybody uh which is a little concerning uh but it was really really impressive and so there's like this slight part of me that's like you could pay anything right now and this is going to be a bigger business in the future but obviously that's not the way we invest it just uh there The tech is wonderful, and that is maybe the entire investment thesis in and of itself, but the management just seems like a low life for me.

Yeah, I'd agree. I'd agree. Let's see if I have anything else here. We talked about, yeah, I guess improving. They are improving their margins. I did like that. I think they talk about contribution margin, which again, excludes stock price compensation, but that went from like 17 to 55 i think that's good um clear path to growth which we talk about a lot but i do like when there is that clear path to revenue growth they have that long-term guidance of four billion dollars in revenue by 2025 which seems a bit audacious but if they can get there that's quite impressive um low lights there's outside forces like i mentioned that can hamper growth um a lot of stock-based compensation and the eccentricity of management so uh that's just

tough to get around it's just tough to get around but you guys have anything else before we hit the more or less interested i guess maybe a competitive advantage maybe this is a highlight as well but think about how hard it would be to start a competitor to this you would need so much capital up front to do customized software for massive enterprises like this like especially going one at a time business by business that seems really hard to scale for anybody that doesn't have enough money now palantir obviously has enough money in their own chairman uh but also the access to capital is pretty easy peter teals yeah i mean he's obviously got if they're dying for a few dollars here and there i'm sure peter teal would dip into the piggy bank but yeah

and now they're in the public markets and they can raise capital at will so um yeah i guess that would be a competitive advantage for me yeah ian anything else before i do the final question nope all right more or less interested what do you guys got in you want to go first yeah i'd say i'm slightly more interested um i had a pretty low level of interest to begin with just because it seemed like it might be in that too hard pile but uh i think ryan's pointed out some good things here that kind of gives us gives me a little hope that i might be able to understand it and uh uh you know i it's the strong revenue growth And like you said, a clear path. I'm a little interested. It's going on the shelf for now,

but I'm interested. Yeah. Ryan? Yeah. I wanted to hate this thing. I really went into it thinking, all right, management's all themselves. It's one of those frothy stocks and it's got a sales multiple in the 40s, which I always have a hard time with, but I was really, really impressed. And so I am more interested. This might be one where I set maybe a more desirable price. and have to do a little more digging with the tech. But yeah, it's a fascinating business. I was glad Ian picked this one.

So what about you? Yeah, I'm in the same boat. I'm more interested in the business. There are a few red flags around stock-based compensation, like we mentioned. And I do worry about the eccentricity of management, but the business looks solid. But I mean, valuation is just insane.

it's insane uh it needs to get cut the valuation at least on a sales ratio needs to get below i don't know 10 15 there's yeah it's just it's in it's i know it seems lazy because we say that every week but but but they're also like i you know this isn't this isn't my favorite business and i agree the valuation's a little crazy but when you're growing revenue by 40 or 34 with your average revenue per customer at 34% with your top 20 customers who are in seven, eight, nine figure deals like that can eat up those sales multiples pretty quickly. And like I said, I'm not, I'm not rushing out to buy this stock. I'm, you know, I've got some questions and valuation is one of them, but it doesn't, it doesn't seem as insane to me as it seems to you,

I guess is what I'm saying. Yeah. Yeah. This is not, this is one, I guess, I don't know if all other stuff kind of checks out you know there's some other things to you know look into before buying you probably gotta wait for the proxy statement i think that would be an important one here but this isn't one i wouldn't be afraid of paying up for uh but 44 i don't think i would no matter what the company is i'm not paying 44 times there is part of me that sees this as a software that runs like a dystopian future though that's a little bit of a concern for like data on every single person and the enterprise elite have access to it by paying millions of dollars that's a little concerning government oversight just connect a few dots

there and you might get a little depressed but they can make some good money at the same time that could be a really good investment but yeah um all right next stock for the week you're on your turn stock for next week i'm going with evolution gaming group i think they're a swedish company um i think they have to do with uh i'm not sure casino gaming like uh like sports betting i might be wrong on that but it was pitched to me over uh twitter so robin hooker is it oh okay he ain't good he ain't good what is that oh it's because gambling casino oh okay well uh yeah evolution gaming ticker evo evo exciting yeah i mean that one i mean And I hate to be the confirmation bias, but I see Jerry Capital tweet about something.

It hops on my radar for sure. So, all right. That's going to do it for this week. Thank you guys for listening. Remember, we are not financial advisors. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold positions in the securities discussed on this podcast. Thank you all for listening.

We'll see you on our next episode. Bye.