Alex Karp Has A Plan For Stock Based Compensation
Stock based compensation are the three dirtiest words you can say when talking to a Palantir bear.
The reason for this is because, well, Palantir does a lot of stock based compensation. However, CEO Alex Karp was recently asked about stock based compensation on the latest earnings call. He had some thoughts around the issue and was quite candid. Overall, he laid out a framework for understanding why Palantir engages in extraordinary stock based compensation and when we should expect to see it decrease.
What is stock based compensation?
Stock Based Compensation is a way of paying employees, executives, and directors of a company with equity in the business.
Why do companies do this? Well, it doesn't take a genius to figure out how to motivate other people: make them feel like they've got skin in the game.
If you ever worked a job, you likely only cared about making sure you got your paycheck at the end of the day. All of us care about money, and as long as no one messes with our check, then we're good.
You probably cared less about your boss's issues, the macro issues of the company, or the public perception of the business - as long as you got your check.
Well, one word changes that: equity.
When you have ownership in a business, whether as a retail investor or as an employee with a significant amount of shares/options, you start to care more deeply about the company you work for since you now own a portion of that company.
Stock Based Compensation Is NEEDED for Palantir
Palantir is a company that competes with Google, Meta, Amazon, Netflix, and more tech giants for talent. Those companies have loads of cash and other perks they can offer top technical talent.
In order to compete for the best talent in the world, Palantir cannot just convince employees around their mission. The mission is a big part, but everyone wants more upside opportunity financially.
If a top technical engineer at google is getting 1/5th of what they could at Palantir in terms of stock - even if the company is riskier to succeed, the upside is gigantic if they do succeed.
If that engineer is convinced of the mission and the potential, that's when offering a significant portion of stock as their compensation package begins to make sense.
Palantir Is Already Operationally Profitable
As per Q4 earnings, Palantir is -14% in the red in terms of GAAP (generally accepted accounting principles) when it comes to profitability.
If you take out the stock based compensation, they are operating on a 29% profitable margin - meaning they would have made $500M of profit on the 1.5B in revenue they brought in.
When asked about this issue on the earnings call, Alex Karp reiterated the argument expressed above around why stock based compensation is necessary: they make the best products in the world and therefore need incentives to keep the best talent in the world.
However, he also claimed that "within 18 months, latest 2 years," the stock based compensation would begin to heavily normalize. The reasoning behind this was because Karp acknowledged that when they were a private company, they never had to worry about stock based compensation.
It was just something the company did to get talent - they weren't worried about how wall street would react to the issue since they weren't creating compensation packages for wall street to judge them on.
When they went public suddenly in 2020, they didn't realize how wall street would react to something they were doing simply to build the best products.
While they have reduced SBC heavily, (from $1B in 2020 to around $ 700M in 2021) they still acknowledge that SBC is necessary to retain and attract top talent.
Karp has explained that in order to be GAAP profitable, which would be the main basis to move the stock higher (and actually provide the upside to those who are rewarded in significant portions of stock), then they would be reducing SBC and "normalizing" it over the coming quarters.
I expect Palantir to follow through on this because using SBC is just a means to an end - getting the best talent to make the best products - and eventually when growth takes over and the company is self sustaining, they don't need to have massive amounts of SBC.
Time will tell, but for now the worst strategy in the world to bears is actually the smartest and most efficient strategy compete with trillion dollar technology companies for bulls.
You can watch a video of me discussing this issue here.
Thanks for reading the article. If you'd like to get in contact, please @ me on twitter hereor email me at amit@dailypalantir.com.
