Why Palantir's Alex Karp Is Okay With The Macro-Economic Downturn
Palantir's CEO Alex Karp recently did an interview with CNBC, and he made some interesting points around why the macro economic downturn is actually good for a company like Palantir.
First, let's review why the company isn't too worried about rising interest rates and inflation:
They have no debt
They have $2.3B of cash on the balance sheet
Palantir buying $50M of Gold in August 2021 was basically a sign that they understood some stuff was about to go down.
We were coming off of one of the most impressive 2-year bull market runs in history. The only problem was, the fed printed almost $7T of liquidity to pump into the markets in order to prop it up. It seemed obvious that things would come crashing down, resulting in higher inflation due to all the money printing, supply chain issues because of the lasting pandemic effects, and rising interest rates to combat an overheated economy.
As a result, it almost seemed as if Palantir was preparing for hard economic situations.
During the interview, Karp keeps this same tone. When asked about the stock price falling, he responds that he doesn't look nor care about the stock price.
While we all know that this is likely not true, it's how Karp justifies not caring about the stock price that is so interesting.
He tells CNBC that most technology startups, which are Palantir's main competition for talent, have spent the past 2 years being propped up be loose venture dollars.
And, he's correct about this. The private markets were putting multiples on tech companies that seemed unheard of, outpacing multiples in the public markets. Some companies were raising venture capital dollars at 100 times ARR. Meaning if a startup was doing 1M dollars in annual recurring revenue, they were raising money as if they were valued at $100M dollars.
See the fall of one of the most popular startups in 2021 here.
Karp argues to the CNBC reporter that this macro downturn is good for Palantir, even if the share price isn't. In order to retain talent, you've got to incentivize them to stay at the company. When you have tech companies (that are likely optimizing for advertising and not doing the most important things in the world) offering ridiculous salaries to Palantir employees, it must hurt to see them leave and focus on non-critical things in the tech space.
It obviously hurts the company, since now they need to go out into the market and compete for talent.
Well, if the economy has a downturn, those same startups can't do that. They don't have the ability to offer inflated salaries. They can't just give away a ton of equity. And if the mission isn't exciting along with the dollars not being there, it's hard for startups to recruit top talent away from giant tech companies. Their valuations require cutting costs, not over spending on employees.
From Karp's perspective, this is bullish for Palantir. They get to retain employees, make sure they can allow them to focus on things that actually matter, and eventually keep them for the long term as the stock price hopefully appreciates, allowing the employees to have their options become profitable over the next 5-6 years.
Given Palantir has no debt and doesn't need to borrow money, higher interest rates will affect the valuation of the company on a macro level, but not affect the actual borrowing the company needs to do for capital. The cost of capital is not becoming more expensive for Palantir because, well, they aren't borrowing capital.
If they can survive the next 24 months, retain their best talent, and get through inflation and high interest rates, Palantir may come out stronger than ever when this bear market is over.
And if they keep their smartest employees focused on actual problems, and not the metaverse, that would be a plus as well.
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