Michael Burry is laying out a sharp warning on Palantir’s (PLTR) valuation, noting that the stock is trading at levels far beyond what the company’s fundamentals can justify.
In a new interview on the Against the Rules podcast, the “Big Short” investor explains why he has built a large long-dated put position against the data analytics firm.
Put options serve as a hedge against any potential downside for a stock. In Burry’s case, he’s using put options to bet that PLTR will collapse. Last month, Burry revealed that he bought 50,000 short contracts at $1.84 each, with each contract controlling 100 PLTR shares.
Now, Burry says he bought the contracts expecting PLTR to drop more than 82% from its current price in two years.
“It is like a $200 stock now, but I think it is worth $30 or less.”
As of Wednesday’s close, PLTR is trading at $176.
To explain his massive downside price target for Palantir, the famed short-seller points to what he views as a mismatch between Palantir’s revenue base and the wealth created inside the company.
“There are, I think, five billionaires that came out of Palantir because they own Palantir stock, and the revenue was $4 billion or less, basically $4 billion. So the billionaires-to-revenue ratio was greater than one. And I had never seen that before.”
He says the company’s use of stock-based compensation and buybacks creates the illusion of profitability while masking the real cost of running the business.
“Stock-based compensation basically weighs almost all their income. They have to pay their people who are doing all this consulting so much in stock that they just use stock-based compensation. And then what they do is they buy that back.”
According to Burry, Wall Street’s habit of treating stock compensation as a non-cash add-back leads to inflated earnings that do not reflect actual economic reality.
“The company would like you to just give them credit for, and what Wall Street generally does, is they take the earnings per share, and then they add back the stock-based compensation because it is non-cash. And they add it back to the earnings.”
He argues the accounting understates Palantir’s true costs and says investors should look at how much the company spends to offset dilution. He says the picture becomes clear when you measure Palantir’s performance over time.
“The real cost, you can look at how much companies are buying back to offset that dilution. And you can just take that amount and deduct it from cash flow. And so, if you do that with Palantir, historically, they do not make anything. I basically looked at the company and said, ‘You are worth this much, and you really do not make anything if it is a tiny little bit of revenue and you have all these billionaires.’”
Essentially, Burry says Palantir has created a loop where it issues stock to compensate consultants, ignores the expense, uses cash flow to buy the shares back and reports inflated earnings, which works as long as PLTR is on the up and up.
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