What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing the entire stock market, and especially high growth technology stocks have gotten off to a bad start. In 2022, this has been driven around fears of inflation. The fed raising interest rates and more recently, fears about russia invading ukraine. The tech heavy nasdaq 100 index is down 14, which puts it well into correction territory.

The most speculative parts of the market have been hit the hardest, with kathy wood's flagship arc, innovation, etf, losing almost a third of its value in the same period. This has been especially painful for many retail investors, who are overweight, disruptive innovation stocks. One of the most popular stocks among individual investors is a software company palantir in the months following the direct listing in the fall of 2020, the stock almost quadrupled and reached a market cap of more than 60 billion dollars. The stock proceeded to lose two-thirds of its value and its current share price is only slightly higher than the listing valuation.

On february 17th, they reported their fourth quarter. Earnings results which beat expectations on the top line, but their net loss widened to more than 150 million dollars. By the end of the day, the stock had tanked 15 to a 52-week low in this video. We'll look at what pounds here.

Does why they're losing so much money and why their share price is free, falling quick pause from our sponsors over at masterworks.io. While you've been watching this video, your paycheck has become worth almost eight percent less. That's the real impact of inflation on your earnings. Obviously, i'm trying to be a bit dramatic here to make the point, but it's an important one.

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This is not an indication of masterworks overall performance and past performance is not indicative of future results. So come join me in over 300 000 other members on the platform by using my link in the description to get priority access, see important disclosures at masterworks, dot, io, slash disclosures and now back to the video founded all the way back in 2003. Palantir is a software company with two main products: gotham and foundry. Gotham integrates unstructured data sources into one unified platform which intelligence analysts can use to investigate, suspected terrorists, monitor actions of foreign adversaries and a whole host of other national security concerns.

While gotham is mainly focused on the military and intelligence agencies, they also have a product called foundry, which is geared towards large commercial enterprises. Foundry is a software tool that helps companies manage the vast arrays of data that they have throughout their operations. This can be incredibly important to business decision. Making an intelligent application of foundry can give a company a significant competitive advantage.

Take the hypothetical example of a large manufacturing company like boeing building airplanes is an incredibly complicated process with thousands of parts coming from different suppliers. Managing the supply chain and optimizing input costs can be the difference between making a profit and a loss. Foundry integrates all the disparate data into one platform which can be accessed by workers at all levels of the organization. Palantir can also support simulations of various supply.

Shipping routes and other things of that nature. This is an invaluable tool for squeezing out every last dollar of efficiency. Importantly foundry has low code and no code functionality. That means that almost every employee at a corporation should be capable of using the system, regardless of their computer skills.

This all sounds great. Palantir creates valuable software solutions to help their large enterprise clients operate more efficiently and most industry analysts think that they're well ahead of the competition and maintain a near monopoly within this niche. But if that's the case, why is their stock price keep falling like a rock while their revenue has been growing at above 30 percent year over year they have been consistently losing more than 100 million dollars per quarter since they went public one of the main reasons That palantir software is so good is because it is highly customized whenever a customer is implementing gotham or foundry. Palantir sends so-called forward-deployed engineers to help customize it with their specific use cases, while that's great for the customer.

It's a massive burden for palantir for a traditional software company. They spend a lot of effort writing the code for their product, but once it's written, the marginal cost of selling it to a consumer is basically zero, because it doesn't cost anything to copy and paste what they've already created. This is why they can become highly profitable once they achieve scale, but for pounds here. Every time they land a new customer, they have to send forward deployed engineers to get it up and running.

You need incredibly good computer science skills to be a forward-deployed engineer. There's heavy competition for these engineers amongst tech companies and they thus command very high wages. According to glassdoor, the average forward deployed engineer at pounds here gets a base salary of 129 thousand dollars per year, plus performance-based compensation of nineteen thousand dollars. That's a total compensation of almost one hundred fifty thousand dollars when you have to hire so many of these people, it's much more difficult to turn a profit.

That's why the stock has come under so much pressure in recent months with the fed expected to start hiking interest rates. Palantir is one of the most vulnerable companies. Despite their impressive revenue, growth and differentiate technology, they are losing money and the path to profitability looks years away. Volunteer bulls will often point out that the company is already highly profitable on their adjusted accounting metrics.

Their adjusted operating margin has consistently hovered at around 30 percent. Over the past year, adjusted operating income is operating income, excluding stock-based compensation. Palantir is a prolific user of stock-based compensation. They pay their employees in stock, so their interests are better aligned with the company also because the company is losing money.

Issuing new shares to their employees is an easy way to preserve cash. It's very easy to engineer, adjusted profitability. When you pay workers in stock, you don't have to give them as much cash to keep them satisfied that can boost the adjusted operating margin without changing the fundamental economics of the business. The dilutive effect of stock-based compensation can easily be seen in their total number of diluted shares outstanding from the beginning of 2020, through the first quarter of 2021, their number of shares tripled from 600 million to 1.8 billion.

To be fair, this is a noisy number because a lot of stock options and incentive packages vested right after their direct listing in the last 6 months, the rate of share issuance declined substantially, but still increased by eight percent, as the share count goes up. The ownership stake attributable to each share decreases, which should make them less valuable volunteers. Reliance on share based compensation adds another risk to the stock. Let's say they want to pay one of their engineers.

Thirty thousand dollars in stock based compensation back when the stock was thirty dollars a share. They only had to give them about one thousand new shares now, with the share price at around twelve dollars, they'll have to issue two thousand five hundred new shares to equal. The same value that could lead to a vicious cycle of a declining share price and accelerating dilution, of course, once they become profitable. This won't be an issue anymore.

If they achieve gap profitability, they should have enough cash flows to buy back stock equal to the amount of stock-based compensation and stop any further dilution. Ceo alex carp says the company has a clear path to profitability, but has declined to give a firm date of when this will happen, given the negative sentiment around growth stocks at the moment, this lack of clarity was enough to send shares, nose, diving to a 52-week Low their gross margins are within striking distance of 80 percent, even when you include stock-based compensation. The reason they're making net losses is because their aggressive spending on research and development, as well as sales and marketing in 2021, they hired 68 new sales people for their us. Commercial business, representing a more than six-fold, increase in their head count.

They grew their revenue by 41 in 2021 and they expect to continue growing at 30 for the next few years as their revenue scales. Their sales and marketing expenses should decrease as a percentage of revenue, and they appear to be headed in the right direction. Their gap operating margin has increased from negative 49 in the fourth quarter of 2020 to negative 14 in the fourth quarter of 2021.. As long as pounds here can continue innovating, there is a path to profitability, but it may take a few more years and in the meantime, they'll continue to issue new shares.

Hypothetically, let's say you think the stock should be worth thirty dollars once it becomes profitable. But if this is three years away, they could easily increase their share count by another fifty percent, once you account for the dilution, the thirty dollar price target goes down to twenty dollars, so there's less upside than you might think. Even if you are a long-term believer in the company, this is something you have to consider with that being said, if you buy shares today at least you're better off than the people who bought it at the top and are already facing a 66 loss, alright guys That wraps it up for this video. What do you think about pound tier? When do you think they'll become profitable? Let us know in the comments section below, as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.