Julian Lin On Palantir, Google, Meta And Apple
Contributor since 2019 / 189 Followers
Summary:
- Julian Lin discusses Palantir as a controversial stock with potential for growth.
- Meta Platforms and Alphabet are his top tech picks, citing their strong execution and compelling valuations.
- Apple may develop its own search product, which could impact Google’s market share.
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Julian Lin’s favorite tech stocks. Controversial and interesting Palantir. (0:40) Why Meta Platforms and Alphabet are Julian’s top tech picks. (5:10) Will Apple develop its own search product? (10:00) This is an abridged version of a recent conversation.
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Transcript
Rena Sherbill: Julian Lin, welcome back to Investing Experts. It’s always great to have you on. You run an investing group called Best of Breed Growth Stocks, as many may already know on Seeking Alpha. You talk about a number of different sectors over there but today, I think that we should focus on tech stocks and what’s going on over there.
I wanted to start with Palantir (NYSE:PLTR), it’s a stock you’ve covered. Victor Dergunov was on a few months ago talking about Palantir, how it can go as low as $7 and he’s still going to be buying it because it’s going to go high and he’s long-term extremely bullish on that stock.
I’m curious, how you would articulate your bullishness on that stock in particular? And then if you’d care to articulate your thoughts on your — the other kind of main stocks that you’re bullish on?
Julian Lin: Palantir is a very controversial stock. Very, very popular among growth investors. I think with Palantir, for much of its life, it seems like a lot of investors and Palantir seem to care very little about the valuation, which may add to some of its notoriety over more conventional value investors.
But the way I view Palantir is that it is an implementer for artificial intelligence and deployments. It’s always been in this kind of space. And so this rise in generative AI has only helped increase the demand for Palantir services.
And as I detailed in a past public article on Palantir, I believe that they will eventually have what I call an NVIDIA moment. Meaning just there will be a moment where the company shows in the fundamental results that the demand has arrived, that customers are coming, and they’re trying to very aggressively deploy more generative AI applications. But the interesting point with Palantir is that, none of this has arrived yet.
So, there’s some impatience there, but even though revenue growth has been slowing, they have still been able to deliver incredible improvements in profitability. I still remember when it IPO’d just several years ago, a big bearish point was that it wasn’t really profitable, right? The company has always been generating high free cash flow margins. So, it was very low financial insolvency risk, but a lot of that cash flow was due to the fact that equity compensation was so high.
And that’s another topic investors like. But now that Palantir is profitable on a GAAP basis, you no longer could make that argument anymore, right? So even inclusive of any equity based compensation, they’re still generating real GAAP operating profits and their GAAP net income is even higher than GAAP operating profits because they have a large net cash position and no debt.
So they now have a bulletproof balance sheet, very strong cash flow structure. But what’s left is mainly just the valuation. Does not make a whole lot of sense if my thesis on an acceleration of revenue growth does not happen.
So, yeah it remains a controversial stock, perhaps even more controversial now that the stock is performing so strongly as of late, but I think that there are legitimate reasons to be optimistic for that name.
RS: And you don’t think that there’s — the proof is in the pudding at this point – you think there’s still further to go?
JL: Yes, absolutely. I think, well, they obviously deserve credit for making that transition to GAAP profitability. But at my core, I still care deeply about valuation. If revenue growth is, continues trending downwards and gets to like 12%, 10%, 9%. The current valuation does not quite make sense. Just – it doesn’t – it will be a little bit too rich.
The current valuation is clearly pricing in, I mean assuming the smart money is in this, is clearly pricing in acceleration to the 20%, 25% level at some point over the next coming quarters.
I guess one thing I could say is, Palantir investors, they might want to be concerned if growth is not accelerating meaningfully over the next one, two quarters. That might then be a red flag that hope may never reaccelerate based on this generative AI thesis.
RS: In which case, you think then it would be time to get out of the stock?
JL: Yeah. And at that point, I would definitely need to adjust my bullishness for the stock just given, especially if the stock is still trading anywhere close to where it’s currently trading today.
RS: Any thoughts on your other tech favorites?
JL: Yes, I think that it might be difficult to name a compelling small medium cap name just given that valuations are just so much more rich relative to 12 months ago. 12 months ago, you could have just thrown a dart at a board and you could have come up with a pretty attractive thesis for almost any name. But right now I think overall the tech sector will perform strongly, but the average tech stock and they’re kind of more fairly valued.
I think my top picks in the tech sector are still going to be some of those mega cap names. I like both Meta Platforms (NASDAQ:NASDAQ:META) and Alphabet (NASDAQ:NASDAQ:GOOG) (NASDAQ:NASDAQ:GOOGL) for similar, but also different reasons. It’s interesting that Meta Platforms is now trading at a premium to Alphabet, whereas it typically had traded at a discount, a lot of that is due to the fact that Meta Platforms has been executing very strongly.
They delivered an incredible year of efficiency. This year, for example, their Family of Apps profit margins is over 50%, which is quite stunning. Obviously their overall margins is being pulled back due to their ongoing investments in the metaverse, but even then their profit margin is still very high overall. And Meta Platforms have shown that they are a huge artificial intelligence beneficiary.
As a customer of their own artificial intelligence, they have been able to overcome the competition threats from TikTok, overcome the data privacy changes from iOS largely due to AI. And I personally use a lot of their products, Facebook and Instagram. I have noticed how they have been able to recommend posts that I don’t follow.
That’s all AI. It’s quite incredible how strongly they’ve executed at Meta Platforms, and the stock is still trading at compelling valuations, especially if you back out on the Reality Labs’ losses just to try to get a better sense of what you’re paying for that, Instagram and Facebook.
On the other hand, Alphabet, Alphabet is trading a bit lower just largely due to the perception that it is losing market share in search with being having that ChatGPT first mover advantage. And Google’s Bard maybe being still subpar at this point. So, there’s a couple of things with Google.
One obviously valuation. This is a name that’s trading quite cheaply. And that’s even before accounting for its large other bets losses. But I think people are underestimating the high moats at Google. But more importantly, what I don’t see being talked about much is the fact that Google has not done the same aggressive cost cutting, seen at something like Meta Platforms, or other tech names.
If I recall they only laid off around 3% of the workforce, which relative to maybe the 30% layoffs at Meta Platforms indicates that if Google were inclined they could always have that lever up their sleeves to even to make — to further increase their earnings and then the stock will be even more cheap. So, I think that there are some in spite of the — perhaps relative bearishness on the name due to the competitive threats on being and the ongoing lawsuits, the DOJ and it’s payments to Apple (AAPL). There’s a lot of reasons like Alphabet over the next, over a five year time horizon.
RS: And any thoughts in terms of what they may not continue to do right at Google and at Meta Platforms?
JL: For Meta Platforms, at this point, they’re firing on all cylinders, but the main potential issues might be, one, the company might invest too heavily in Reality Labs without much return.
That’s definitely an important risk, that might be rising just given that the stock has been performing so well ironically, and their profit margins are increasing at the Family of Apps. Perhaps management might see those two as justifying increasing aggressiveness in their metaverse investments.
And at Alphabet, the main possible issues might be if they’re unable to prove that search is a business with high moats and high barriers to entry. If it turns out that search is just a commodity.
And let’s say, Apple (AAPL) removes Google as the default search provider, and Apple users are very okay with either being or maybe a future unreleased Apple search product, then that would be a big problem at Alphabet.
It’s largely out of their control, what is going to happen at the DOJ and what happens with Apple.
I’ve always had the hunch that Apple is developing their own search product. I think at some point, they are going to be – they are not going to be the default search engine for Apple. They’re going to maybe save on some fees, but they’re going to have to cede some market share. I think it’s inevitable.
It just never really made sense why Apple would not own search. They try to own everything else of their product, but they don’t own search. I think at some point that will happen. But I think that there’s enough levers for margin expansion.
At Google, there’s a lot – it’s a very big market in terms of the long tail end secular growth opportunity. The current valuation is quite attractive that even as the Apple threat unhappens over the next 10 years. I think the stock still is quite compelling, attractively valued and I know that this Apple threat is not even really the focus of Wall Street at this point.
RS: Appreciate it Julian. Appreciate another great conversation. Happy for you to share with investors any final thoughts that you may have on the market or on this specific sector.
JL: Sure. Yeah, I think, I guess some important takeaways would definitely be to not just view tech as being in a bubble. I think there’s a lot more nuanc to it.
Definitely need to keep in mind that the profitability profiles is dramatically different now than just one, two years ago. I think that valuations are also much more reasonable. So, at the very least I find it dangerous, it would be very dangerous to be shorting the tech sector overall.
And if any listeners are interested in more of my overall portfolio, which tends to be more growth oriented, but not necessarily tech oriented. Yes, as you mentioned, I do run investing group on Seeking Alpha called Best Of Breed Grow Stocks. You get access to the Best Of Breed Growth Stocks portfolio, as well as the universe, which is a watchlist of all of the names that I follow. Otherwise I am also available on Seeking Alpha.