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after the year-end 2021 earnings release arc has dumped nearly 50 percent of their palantir position which is close to 13.5 million shares in addition to what they sold earlier this month and the end of january until the middle of january art was the buyer of palantir in the 16 to 18 range and last year in the 20s so what has changed that arc decided that even with the decline in the stock by 30 to 40 percent from the recent purchase that balance stock is no longer worth for them to hold in their innovation and disruption funds panther numbers were impressive in my view and in line with the growth company 41 revenue growth 29 operating margin 1.55 billion dollar revenue and nearly 420 million of free cash flow zero debt and 3.8 billion of remaining deal value as i understand from my twitter feed the reason arc quoted for the cell is the decline in the growth in the larger government division so let's take a strategic lens on the arc selling of valencia i'm your host sachin and welcome back to channel so let's start with the arc thesis on palantir based on what they have shared in public so far last year in cuba and during a cnbc segment kathy woods said that the palantiya ceo comments her music to her ears she said she upped her bullish position in palantir after hearing management's comment about aggressively investing in the future her exact words were it's exactly how we invest we want our companies to invest aggressively we do not want profits now this statement was in line with arc philosophy on investment for the longer term based on their research and thesis in disruption and innovation she also shared further views on palantir as a long-term player and in her thesis considered it as a strong and leading candidate in enterprise says even stealing aws in the cloud market in the future except for few trimming sales arc has been a buyer of valencia mostly over the last year and until recently january 2022 so what changed suddenly since arc was a buyer until recently as close to mid gen it is fair hypothesis that the change in opinion has happened very recently and it has to be quite major change as they were the buyers of palantir in 16 to 18 range and decided to dump it in the 10.5 to 13 dollar range arc maintains a minimum hurdle rate of 15 percent for five years for any company as per their own admission the number breaks down as follows if arc on average bought palantir at 17 then they expected the company to reach a valuation of 68 billion dollar in five years to pass the minimum hurdle for investing since their position was reasonable and given the approach of sensitivity they take it is fair to assume that overall the expected palantir in range of 70 to 90 billion dollar at least in five years that is 3x to 4x from the current market cap of 22 billion dollar then they decided to dump the position so by their own admission in past that what they have shared about fund mandate it has to be linked with the decline in their valuation of companies ability to meet minimum hurdle rate that is at 22 billion of current market cap they expect now that palantiya will be worth far less than 44 billion dollar market cap in next five years that's like 50 percent change in valuation about thesis in sector they themselves reported over 100 million dollar worth of value to be created in this decade in ark thesis about palantir they never mentioned that the government moved as a reasoning for sticking with it and reasoning for growth in fact by their own admission they said that see is stealing business from aws which implies that their view was based more on the commercial growth problems of the company now commercial growth for palantiya was 47 year on year and they are almost increasing their sales force to additional 200 people in 2022 from the current 29.
the difference between gap and adjusted operating margin has gone down by half and carb clearly mentioned that it is one metric he's focused and will converge on it in coming quarters u.s commercial revenue growth was 132 percent which is phenomenal by any standard in fact the commercial growth has been steadily rising since they have gone public both in u.s and in non-us market especially given that kobe has heavily impacted their ability to expand in new markets but despite that our view on valuation change by almost 50 percent on pltr based on their implied actions the reasoning of it was given as government business where growth has declined the government revenue growth declined from 76 percent from q1 2021 to 26 percent q4 2021 isn't that market was expecting since dpo and repeatedly saying that government business is already quite large and will slow down and we need evidence of sustained commercial growth which balance valencia has provided over the last year also government business is more cyclical in nature and as valencia is now nearing il-6 certification that is likely to open a whole new level of government them again for them they are sitting on many government panel discussion and have a deep working relationship that shouldn't be discounted even with an unfriendly administration our innovative and disruptive companies are going to produce sustained growth on all sub-metrics quarter after quarter in the scale of phase no because if that is the measure then ark should sell almost half of the companies in their own portfolio polynthia did exactly what they said they will do in year and 2020 earnings one year before and kept good guidance even in this year's earning also if government growth slow down is the reason for selling then why did they started selling three weeks before earnings in short things don't add up as ark has presented to us even by their own statements fund functioning and view on company they did not make a single statement on how likely that commercial growth hit alone can maintain the requirement for the 15 huddle rate over five years in field of investing and finance smart talking has its place and you can wrap up any kind of useless logic at time in the articulated form and wash your hands in my opinion our problem is following and they are shying away from citing the real reasons arc etfs has been in decline since last february and attack on its performance has been increasing by media more and more the etf has become a preferred choice for many to short and hedge against market since last year kathy and arc team is paid a fraction of fees on the total asset under management so more the assets under management more the fees for them and this is the pain point due to decline there has been significant outflows from the etfs and it has impacted the fund performance and their take-home income kathy and our team is under pressure to arrest the decline of the fund and have mixed near-term trading heavily in what was supposed to be a long-term buy and hold strategy in short the fund in my opinion is no longer true to its mandate the reason for selling palanthia was simply driven by the objective of a short-term gain from another stock which they think would appreciate better in terms and in this case it is likely roku we all have seen what happened with roku stock also during the same time kathy published an article in december titled innovation stocks are not in a bubble we believe they are in deep value territory in this article should discuss perhaps influenced by negative headlines in the media and by the inherent volatility of our strategy some clients have sold near the bottoms of market cycles turning what otherwise would have been a temporary loss into a permanent loss she said that for that reason arc places significant focus on its five-year investment time horizon its primary message is that innovation solves problems and is expected to transform human lives at an accelerated rate during the next five to ten years she said that historically and according to ark's research this concentration of our portfolio during correction has led to significant absolute performance and relative outperformance as the market rebounds she also said that after correcting for nearly 11 months innovation stocks seem to have entered deep value territory their valuations are fractions of the peak levels many skeptics attribute their outside returns last year to stay at home stocks and expected their fundamentals to deteriorate this year this is another tactical mistake she made which was more based on the hope than evidence calling the bottom of a market couple of times in december and january without any sign of actual reversal in fact if history is any evidence the declines in the last phase are quite massive and certain rkdf is underperforming the major indexes by a huge margin even the flagship companies they embodied historically like tesla so here is my view on what they are doing their fund is under heat over performance and their narrative over inflation and bottom of the market is being challenged they are seeing high outflow which at the end of the day is impacting their take-home salaries and bonus they produce no to limited evidence of some of the near-term trades and flip-flops they have made in several stocks including valencia and instead try to hide it by well articulated mumbo jumbo only their lack of access to private market has left them handicapped at a time where most innovation and disruption based companies have seen appreciation in valuation in private market despite what was going in public market so they have no hedge and respite they have badly mixed near-term trading activity into what primarily should be a buy and hold strategy they're sending good money after bed in my view there is only one reason to sell valentia for them that is to free cash to buy companies which they think will help in arresting the decline of etfs in near town it's futile in my opinion and hurting them even more at this time their recent activities are less based on research in my opinion but more by human impulsion that has been the kryptonite for many fund managers the single metric they are focusing most likely is asset under management and which is on decline in short arc has lost its way and mission and now likely under the influence of same issues that most funds struggle and often become a one hit wonder i wish arc invest and kathy would success and i hope she discovers her mojo for the sake of her investors kathy and arc investment actions and recent sale on palantir has zero impacts on my own conviction about the company but that's me and you need to find your own reason for conviction in valencia in full disclosure i am personally long in palantir at a personal level i am sharing it as a part of disclosure not as a part of financial advice please be advised that the purpose of this video is to educate and teach tools on how to deploy strategic thinking on business and investment problems in an outside in manner all contents are presented for education information and entertainment purpose only and no portion of this content should be used as financial advice please do share your feedback in comment section and if you enjoy the content do like the video and subscribe to the channel see you next time goodbye you
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