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Broken Company or Broken Stock?

March 1, 2024
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Wiko Steyn
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Wiko Steyn

Unicorn Portfolio Update 4 + Earnings Analysis of $PLTR $PUBM $BEAM

The market is absolutely ruthless at the moment and it is showing no regard for the underlying individual companies. Especially in the growth sector where every stock is thrown out with the bathwater and if you report good earnings you fall 5%, report inline earnings you fall 20%, and with bad earnings you fall 40%. Last year the valuation of growth stocks seemed irrelevant and stock prices soared, then earlier this year valuations started mattering again and we saw them come down to realistic levels, now we have rotated so far out of growth, that it seems like valuations have become irrelevant again, but to the opposite side of the scale. Yes, some are still expensive but many are trading at lower valuations than value stocks and growing >20%. We will again use the quote from famous economist John Maynard Keynes: 

The markets can remain irrational longer than you can remain solvent.

Investors must always ask themselves: Is the company broken or is the stock broken? If the answer is number one, your best option is usually to sell and move on. If the stock is broken, continue with your investment plan, whether this means to HODL, buy more or dollar-cost averaging.  Despite all of the current negativity, we buy innovative technology companies with solid management teams, because we believe that they will continue to grow their earnings power and somewhere in the future their share price will reflect it.

 

Palantir's Earnings

Palantir is still such an exciting company with massive potential. Obviously, there are significant risks and that is why the market is punishing it at the moment. The stock fell more than 20% after its latest earnings. Let's find out if this is a broken company. The link below reveals the reasons behind the negative sentiment towards Palantir on Wall Street:

https://darntons.com/2022/05/13/exclusive-wall-street-report-reveals-negative-thoughts-on-palantir/ 

It is always healthy to look at the bear thesis of companies you are considering for investment.

Some of the presentation highlights from their latest earnings are attached as images. Palantir actually beat the Street's expectation for Revenue, Operating Income and Operating Margin. The adjusted EPS and Cash from Operation were a miss but we think the bigger issue was the 2nd quarter guidance for 2022 which were below estimates.

The two main concerns:

  • Government business is slowing down
  • Adjusted margin for Q1 was 26% and the guidance for Q2 is even lower at 20%

Government business is inherently cyclical and dependent on geopolitics and bureaucratic policies. Although growth from government has slowed to 16% this quarter we do expect to see continued double-digit growth for the foreseeable future. Especially with tension levels at an all-time high due to the war in Ukraine. We also see more European governments relying on Palantir in the future.

The good news is that we are more excited about the commercial side of the business. Palantir added 37 new commercial customers this quarter representing a growth of 136%. The revenue from commercial customers grew 54% and it was the 5th consecutive quarter of accelerated growth in this sector.  

We will keep an eye on the margins, what is interesting is that although the Adjusted Operating Margin decreased, the GAAP Operating Margin actually improved. We believe this is due to an increase in R&D and Sales & Marketing spend but more importantly, we are seeing a normalisation of Stock-Based Compensation (SBC).

You might have heard the term digital twins from Tesla, what you might not know is this is essentially what Palantir provides with its Foundry platform. Digital twins enable companies to operate much more efficiently and we expect that in the future many companies will make this the core of their operations. Palantir's management has been quoted saying:

What AWS has been in the last decade, Foundry will be in the next. 

The question remains, can they actually sell their product to enough companies to become the default operating system for enterprises. This will be a tough challenge.

Read this blogpost by Palantir for a better understanding of true digital transformation:

https://blog.palantir.com/levels-9be772098942

 

PubMatic's Earnings

In this instance, Wall Street actually did a relatively good job of estimating earnings.

  • Revenue of $54.6M is inline
  • EPS of $0.14 is above estimates of 0.1$
  • PubMatic grew Free Cash Flow by 59% which is incredible for a small tech company
  • The Balance Sheet still looks great with plenty of cash and no debt
  • Their relatively new product Supply Path Optimization (SPO) is doing very good, accounting for 27% of ad spend
  • Dollar Based Net Retention remains high at 140%, which is great to see as it is an indication of the stickiness of their products.
  • Operating margins are still not very high and will likely remain like this because they are still investing for the future.

All in all, this was another solid quarter and PubMatic's future is looking bright.

 

Beam's Earnings

Beam is still a preclinical biotech, therefore looking at their revenue, EPS or margins is pointless. We rather look at the updates on their trials, partnerships and balance sheet. 

Their cash position increased from $965M on 31 Dec 2021 to $1.2B at the end of March 2022. We suspect this is the first cash injection from the Pfizer collaboration. Their Net Loss decreased 65% for the first quarter of 2022 from the first quarter of 2021. 

A quote from their press release gives us insights into their pipeline progress:

We are on track and expect to commence SCD patient enrollment in our Phase 1/2 BEACON-101 clinical trial to evaluate the safety and efficacy of BEAM-101 in patients with SCD, as well as make our planned IND submission for BEAM-102, which is also in development for the treatment of SCD. Our immunology and liver-directed pipelines are also progressing, with plans for additional regulatory submissions, research studies and program nominations throughout the year

 

Portfolio Update Summary

We added another 50% to four of our current holdings after earnings, bringing these four stocks to their full positions. We do realise that these stocks may fall another 50% or even more, but we remain strong in our conviction for the next 5 - 10 years. We have decided to add another CRISPR stock to our Unicorn Portfolio after our recent deep dive into this sector. Intellia Therapeutics is our second pick. We might revisit this idea when Prime Medicine or Mammoth Biosciences come public. For more information about this exciting technology, you can read our article: Who Will Win the CRISPR Race

  • Buy $250 PLTR at $6.72
  • Buy $250 BEAM at $28.92
  • Buy $250  NTLA at $40.12
  • Buy $250 PUBM at $18.68
  • Buy $250 INMD at $21.58 

 

Disclosure

This is not financial advice and is based on the opinion of the author. The $10K is not real money and only a demonstration of a typical portfolio. The Unicorn Portfolio is a high-risk portfolio and should always remain a small allocation of your overall assets. This is an actively managed portfolio where we will buy and sell positions as we deem fit without any regard for taxation. Remember, all selling of stocks triggers a tax event in most countries and it is the investor's personal responsibility to always remain tax compliant.

 




 


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