Palantir’s billionaire boss appears to be playing a misplaced blame game.
For much of the last three years, Wall Street and investors have been entranced by the artificial intelligence (AI) revolution. Empowering software and systems with the tools to make split-second decisions, and allowing these systems to become more efficient at their tasks over time, all without the need for human oversight, is a game changer. It’s why the analysts at PwC project a $15.7 trillion global addressable market for AI by 2030 in a report they call Sizing the Prize.
While graphics processing unit (GPU) kingpin Nvidia has received most of the glory in the AI space, an argument can be made that AI data mining specialist Palantir Technologies (PLTR 1.37%) has supplanted Wall Street’s largest publicly traded company as the hottest AI stock. Since 2023 began, shares of Palantir had skyrocketed by 2,670%, as of the closing bell on Nov. 7.
Image source: Getty Images.
Palantir’s outspoken CEO and co-founder Alex Karp deserves credit for successfully steering the ship. His company’s breadwinning AI-driven software-as-a-service platform (Gotham) is used by the U.S. government and its allies to plan and oversee military operations, and it has no one-for-one replacement.
But amid this rampant success, Karp has done the one thing I’d argue a public CEO should never do: draw more attention to himself than his company.
Palantir CEO Alex Karp takes aim at short-sellers
Let me preface this discussion by pointing out that not all outspoken CEOs are inherently bad news for their company’s stock. Though Tesla CEO Elon Musk is no stranger to controversy, his company’s stock is nearing an all-time high.
Nevertheless, a recent rant by Palantir’s billionaire boss in an interview with CNBC laid out his clear feelings about short-sellers (investors wagering on the share price of a public company to decline), and Scion Asset Management’s lead investor, Michael Burry. Yes, this is the same Michael Burry, known as the “Big Short” investor, who successfully wagered against the U.S. housing market prior to the financial crisis taking shape, which generated a profit of around $725 million for his fund.
Today’s Change
(-1.37%) $-2.65
Current Price
$190.96
Key Data Points
Market Cap
$455B
Day’s Range
$187.13 – $192.93
52wk Range
$58.53 – $207.52
Volume
50M
Avg Vol
63M
Gross Margin
80.81%
Dividend Yield
N/A
In response to CNBC host Becky Quick asking about Michael Burry’s put option position in Palantir, which was disclosed on Nov. 3 via a Form 13F filing with the Securities and Exchange Commission (SEC), Karp plainly noted, “I don’t like short-sellers,” and went on to say:
…If you’re a short-seller, you do not have to actually short a truly great company. By the way, the thing that’s great about Palantir is we deliver for the average person on the battlefield, on the work floor, and as investors. Pick some other company to screw with.
But actually in the Burry case, I actually think what was happening was market manipulation. I strongly suspect he was getting out of his position; and to get out of his position, he had to screw the whole economy by besmirching the best financials ever — again, financials that are helping the average person as investors and on the battlefield.
As an investor of 27 years, I learned a long time ago that when CEOs start complaining about short-sellers, it’s usually a big red flag for investors. While Palantir’s operating model and sustainable moat appear rock-solid, I think the basis of Karp’s claims about Burry and short-sellers completely misses the mark.
Image source: Getty Images.
Karp’s rant is high on emotion and short on facts
Let’s begin with the core of Karp’s outspoken rant against short-sellers. Though everyone is within their right to dislike short-sellers, it’s really important to understand what this group of investors can and can’t do.
Short-selling can be profitable, but also comes with risks that don’t exist for investors who simply buy and sell stock. Short-sellers are wagering that the share price of a public company will move lower. Whereas losses are limited to 100% of the principal investment, and gains can be limitless for those who buy shares of a public company, for short-sellers, gains are limited to 100% (a company’s share price can’t fall below $0) and losses are, in theory, unlimited.
Furthermore, short-sellers pay interest (known as “margin”) to their broker when borrowing shares to wager against a public company. Depending on factors that include volatility and demand for short shares, the borrow rate to wager against the share price of a stock can be quite high.
What short-sellers absolutely can’t do is directly impact the operations of a publicly traded business if executives keep business as usual. Wagering on a company’s share price to move higher or lower has no impact on its day-to-day operations, corporate governance, marketing, ability to innovate, competitive pressures, and so on. Claiming that short-sellers are “screwing with” Palantir, as Karp plainly stated in his interview with CNBC, ignores this fundamental fact. It’s like blaming a small section of fans booing in the stands for your sports team losing the game, rather than directing any responsibility to the players who were actually on the field.
Additionally, Karp’s claim that Scion Asset Management’s Michael Burry manipulated markets with his put option trade against Palantir lacks evidence. Like all institutional investors with at least $100 million in assets under management, Scion is required to file a quarterly 13F with the SEC. Burry’s fund is fully in compliance with this measure, and there’s no public information indicating he’s attempting to manipulate Palantir stock.
The bigger issue with Palantir is its historically unsightly valuation.
PLTR PS Ratio data by YCharts.
History tells us that megacap companies, and those leading cutting-edge innovations, have consistently peaked at price-to-sales (P/S) ratios of roughly 30 to 40 for three decades. Prior to releasing its operating results after the closing bell on Nov. 3, Palantir was trading at a trailing-12-month P/S ratio of 152!
To put this into context, no company has ever been able to sustain a P/S ratio above 30 for any extended period of time. Even with annual sales growth pushing 40%, Palantir’s P/S ratio was five times this level entering last week. This is the likely reason why some short-sellers are expecting Palantir stock to decline. Sometimes the business makes sense, but the valuation doesn’t.
If Alex Karp is wise, he’ll let his company’s operating results do the talking, because that’s the best way to combat short-sellers.
