With the exception of perhaps Tesla the software company Paler is probably the single most hyped up stock among retail investors on social media. They even entire YouTube channels dedicated solely to providing bullish commentary about the company's prospect. It's not too difficult to understand why Paler custombuilt software Powers many of the world's top militaries, government agencies, and multinational corporations. and it's run by an Ecentric founder and CEO who's not afraid to speak his mind.

Most importantly, the company has posted strong and consistent Revenue growth since it went public in late 2020, and after losing money for years, they finally reached Gap profitability in 2023. But if we take a deeper dive into Paler Financial results, we will uncover some pretty shocking red flags join us as we look at how Paler became one of the most popular stocks among retail investors and why a lot of this could be smoking mirrors. Before we take a deep dive into Paler I Want to take a quick pause to thank the sponsor of today's video? Public Public.com has just launched its new high yield cash account offering an industry-leading 5.1% Apy, no fees, no subscription, and no minimums or maximums. That means you can grow your cash with 5.1% interest with no strings attached.

It's as simple as that. Again, that's 5.1% interest with no fees, 5.1% interest with no subscription 5.1% interest with no minimums or maximums 5 . 1% interest with up to $5 million of FDIC Insurance just 5.1% interest, straight up, no strings attached. Sign up today at Public.com WSM This is a paid endorsement for Public.com 5.1% Apy is subject to change.

Full disclosures in terms and conditions can be found in the video description. High yield cash accounts are available for Us members only. And now back to the video. Paler creates highly customized software Solutions which can help large organizations bring together and analyze large amounts of disperate data.

Historically, their main customers have been the US Military and government agencies. They can bring together data from satellites, reconnaissance, drones, and a whole host of other sources into One dashboard, allowing the operator to understand the situation and make decisions faster. While Paler software is highly effective for certain use cases, the downside is that is very expensive. Due to its complex and customized nature.

Paler has to send so-called forward deployed Engineers to the customer premises to teach them how to use the software and customize it so it can integrate into their existing it infrastructure to cover the cost of the four deployed Engineers Pounder software is very expensive, in some cases costing millions or even tens of millions of dollars per year. Historically, their customers have mainly been military and government agencies. These organizations deal with complex data sources which can benefit from Paler highly customizable software. They also have the budgets to pay for it.

Private sector corporations have been less interested as there are a ple of Cheaper more standardized software solutions that can get the job done. In most cases, if you only sell to government entities, there's only a limited runway for growth before you saturate the market. As Paler was gearing up to go public in 2020, they pitched investors on the idea that they had massive growth opportunities in the private sector, and investors were not disappointed. at least for the first year in 2021, Paler Revenue grew by 41% This was largely driven by Us Commercial Revenue more than doubling commercial Revenue to revenue from private sector customers.

With these impressive results, the company's share price surged surpassing $30 at some points in 2021. Co-founder and CEO Alex Karp wasted little time in taking advantage of this, selling close to $1 billion of his personal Holdings In the first year following their direct listing, Paler was trying to paint a picture that software was gaining traction with the private sector, which should give them years of future growth opportunities. But where did all these new customers come from? 2021 was a year of the Spack on a near- daily basis. Tech startups would go public by merging with blank check companies.

No matter how immature the technology was or how outlandish the proposed business model, these spat companies, many of which were pre-revenue were able to go public at multi-billion Dollar valuations thanks to the General market. Euphoria At the time, in 2021 and 2022, Paler invested in 23 companies, the vast majority of which went public via Spaxs. The Investments ranged in size from as little as $3 million to as much as 41 million. In total, They shelled out roughly $450 million to make these.

Investments These Investments span a wide range of industries from the electric vehicle maker Faray Future to the Electric Scooter Company Bird Global to the Quantum Computing Startup Retti Computing As an aside, we've made a video covering Retti Computing On our second Channel broken business models, you can check it out in the link in the description below. These Investments are at first difficult to understand. Paler is a software company, not a hedge fund. Why are they investing hundreds of millions of dollars in speculative spat companies to understand what's going on at Palante Here, we first have to understand the concept of round tripping.

Round tripping involves a company selling an unused asset to another company while at the same time agreeing to buy back the same or similar assets at about the same price. The companies appear to be growing and very busy, but the round tripping business does not generate profits. Growth is an attractive factor to speculative investors, even if profits are lacking. Let's say, hypothetically that you own a bookstore, but nobody's buying your books.

The lack of sales is causing your investors to run out of patience. So you go to one of your friends and tell him if he buys a book from your store, you will buy it back from him for the same price. You might even pay him a little extra for his time. From a business perspective, this is a nonsensical transaction.

Whatever cash you receive from the sale, you're just going to have to pay it back, but you can report this as Revenue which looks good to your investors. Similarly, you could pay someone to become your customer. This creates the illusion that there is demand for your products, but it's really just your own money being recycled. Round tripping happens in the business World more often than you might expect, but it's typically much more complicated than the simple bookstore example we just talked about.

There's often a gray area where it's hard to tell the difference between a complex but legitimate business transaction or a deceptive scheme to inflate. Revenue One of the most famous cases of round tripping came from America online or AOL In the early 2000s, their online advertising Revenue was declining as a do com Bubble Burst So they set up round tripping transactions where they would effectively fund their own online advertising Revenue by giving the counter parties the means to pay for advertising that they would not otherwise have purchased. In some cases, they would make Equity investments into Dotom companies. as a condition of the investment.

The company was required to spend some if not most of the money to pay AOL for advertising slots. This increased Aol's reported Revenue in operating profits even though there was a net outflow of cash. 20 years later. It looks like like Paler may have done something very similar for each of the Spat companies they invested in, they can currently sign multi-million dollar deals to purchase subscriptions to Paler software.

Let's start off by looking at Paler single largest investment. In 2021, they invested $41 million into the Flying Taxi company Liliam. In conjunction with this investment, Liliam also signed a deal with a Pay Paler $50 million over the next 5 years for access to Paler software. So Liliam will end up paying more money back to Paler than they receive from the investment.

This raises a couple of questions. Firstly, would Lilam have purchased the software anyway? The answer is almost certainly no. While the software may be useful, Liliam is a relatively small company with just a few hundred employees. They were pre-revenue in need to conserve cash.

Paying $10 million a year on software is way. Overkill It seems highly unlikely that they would have done this had it not been a condition to receive the investment. This transaction can almost be viewed like a loan. Paler pays Liliam $41 million, which has to be paid back with interest over the next 5 years.

To sweeten the deal, Liliam also gives Paler $41 million of newly printed shares. On the surface, this looks like a really good deal for pounds here. Whatever money they invest in these fat companies, they get back in the form of Revenue. On top of that, they basically get shares in these companies for free.

However, it's not quite that simple. Sticking with Liliam, Their share price has declined by 92% since they went public. As investors are beginning to question their viability, they still have not generated any revenue and with a share price below $1 they appear to be on the brink of bankruptcy. If they go bankrupt, they won't be able to fulfill their subscription obligations to Paler.

A number of Paler investees have already gone bust. In 20121 they invested $20 million into a 3D printing company called Fast Radius. Just 9 months after going public. Fast, Radius declared bankruptcy, rendering Paler Equity investment worthless.

According to bankruptcy filings, they still owed Paler $3 million of subscription payments, which will now not be paid when we look at the share price performance of Paler Investments Today, you can't help but be impressed with their extraordinary skill at picking horrible companies. Of the 21 Spaxs they've invested in, all but one of them has had negative returns. They also invested in two privately held companies whose performance is difficult to judge. Nine of the companies or almost half of the total have either already declared bankruptcy or are on the brink of bankruptcy.

Of the remainder, all but two of suffered losses Of at least 80% of the $423 million they've invested in its spat companies. They've suffered roughly $381 million of losses or about 89% of their investment. The poor performance of their Investments is probably not a coincidence, given the unfavorable terms. The only companies who would accept these deals were short on cash and had few other options.

Paler was essentially scraping the bottom of the barrel through the third quarter of 2023. Paler has cumulatively generated 234 Mill million dollar of revenue from its back investees. This Revenue stream peaked in the first quarter of 2022 and has since been declining. This is due to many of the companies going bankrupt or otherwise restructuring their subscriptions.

As they approach bankruptcy. Their gross profit margin is about 80% so today they've probably made about $190 million of gross profit from these deals. While they will continue to generate some revenue from their Spack Inves going forward, it's doubtful they will ever make back the $381 million they've lost so far. Over over all, this whole Spack Affair appears to be a net loss for Paler and a significant one at that.

So why did they do it? Did they actually believe the Spa companies they invested in would be successful? Or was it purely an effort to inflate reported Revenue At the peak, revenue from Spa Inves represented almost 9% of total revenue. This has decreased to just 2.6% in the most recent quarter. So while Spack Revenue may not be significant anymore, it was certainly significant in 2021 and 2022. This chart shows Peners reported Revenue growth year-over-year versus what it would have been excluding the Spack revenue.

Throughout 2021 and 2022, the revenue growth rate decelerated substantially from almost 50% down to around 20% When you add in the Spack revenue, this deceleration becomes much slower given that Paler positioned itself as a Growth Company The rate of Revenue growth is certainly material to their stock price. Furthermore, losses on their Spack Investments are excluded from adjusted Iida, which is their preferred measure of profitability. Of course, this is only a temporary fix. In 2023, their reported Revenue growth was lower than what it would have been excluding the Spack revenue.

Perhaps this is why Alex Carp was so quick to sell shares back in 2021. With that being said, Paler core business has been successful. In 2023, their revenue is still growing at around 20% year-over-year and Spa Revenue now only represents a tiny percentage and they have finally achieved Gap profitability. This makes it all the more strange that they felt the need to do their Spack round tripping.

Perhaps we're being too cynical. It's possible that they just got caught up in the market Euphoria of 2021 and wanted to get in on this fat craze. It might be as simple as that. All right guys that wraps it up for this video.

What do you think about Paler Pack? Investments Let us know in the comments section below: if you've enjoyed this video, make sure to hit the Subscribe button so we can bring you all the most interesting stories in the worlds of business economics. And Technology As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.