Palantir is my largest single short position. In this post I will outline my reasons for being bearish and why I’ve long been skeptical of this stock and the prevailing stories surrounding it.

Last week I read the transcript of an interview Ben Thompson conducted with Sryam Shankar of Palantir. The interview was very interesting and despite being a PLTR bear, I found many of Shankar’s comments to be insightful and make a lot of sense. In the course of the interview, Shankar made the argument that too much attention is being paid to building and investing in the development of frontier models and LLM’s and not enough to what he calls “distillation.” Distillation it seems is another crafty marketing term that makes a simple concept seem complex. It’s essentially applying LLM’s to solve problems as opposed to working on LLM’s. Shankar argues that very few people are focusing on how to make use of LLM’s and so this presents a massive opportunity.

A Forward-Deployed Engineer is a consultant. Distillation is using AI to solve problems. Don’t let their bullshit reality distortion take you in!

Phew. Had to get that off my chest. Let’s continue.

Palantir is in my view one of the largest bubbles in existence today but it’s a bubble that very few seem to realize exists. I actually think very few people even understand what this company does in any real sense.

Palantir today trades at a market cap of around $400 billion. It has been around for over 20 years and publicly traded since 2020 when it IPO’d around $10. So the stock has gone from $10 to $200 in a span of just over three years.

What changed? Did Palantir make some amazing technological discovery? Did they suddenly find product market fit in a new and growing segment? No, the company and product hasn’t changed at all. But they have done a masterful job of riding a hype wave that has gotten totally out of control. Let me explain what I mean.

Palantir has made itself one of the leading AI story stocks despite having no advantage whatsoever in AI. Prior to 2022 Palantir did not have a single reference to AI on its website.

This can be easily verified. Here is Palantir’s website on November 25th, 2021. Prior to 2022, Palantir’s angle was actually data lakes. The reason for this is obvious. Prior to the emergence of the AI bubble with the release of ChatGPT, Snowflake was the enterprise software darling and Palantir wanted to replicate their success. When ChatGPT came out, they quickly pivoted to being an AI company (whatever that means).

The Bubble Begins

There’s an important facet of this story that we need to focus on, and that is the extraordinary, cultish infatuation with this company by the retail cohort. From the time that Palantir went public there has been a large contingent of investors that have been bullish on this company. I’ve followed the subreddits and Fintwit accounts and I can confidently say that none of them really seem to understand what the software does but the secrecy/military angle sells really well. People want to belong to a tribe and if it’s a tribe that has some nebulous connection to the defense industry and taking out terrorists, retailers think they themselves are riding in a Blackhawk going on a secret mission to defend our freedoms. This sounds ridiculous, I know, but this intrigue is a major part of the story.

Not wasting the opportunity to seize upon this intriuge, and likely taking a page out of Elon Musk’s book, Alex Karp suddenly emerged as a mad scientist/philsopher who would regulary conduct wild interviews in which he would lob insults and indecipherable statements while pretending to be on amphetamines. This of course has sold very well with the retail crowd and only bolstered their enthusiasm for this company.

After suffering three years of underperformance, in May of 2023, the retail cohort’s enthusiasm began to pay off. The stock surged and broke out of its range and began it’s ascent. People began reading the fundamentals from the stock price as people tend to do. As the stock price swelled, Fintwit accounts began to emerge that were solely focused on discussing the company. Subreddits like r/PLTR expanded and became echo chambers of bullish narratives. And the stock continued to rise.

Reflexivity: The Hype Becomes Real

It turns out retail is not the only group drawn in by a great narrative. As Karp made the rounds and his star rose, C-level executives took notice and became intrigued. They became convinced that they needed Palantir for…something? So companies began hiring Palantir for new projects.

An interesting feature of software enterprise sales is that even when projects are failing, customers are not incentivized to say so because after all, what execs want to admit that they made a mistake? The opposite thing actually tends to happen- the execs show up at conferences to brag about how successful they’ve been by using whatever solution they greenlit. So the companies that were paying Palantir vast sums of money were compelled to speak to the success of those projects.

Here’s an interview that I witnessed between Alex Karp and former BP CEO Bob Dudley. When I watched this interview I became convinced that this stock was in the midst of a bubble. The entire interview is worth a watch, but one part in particular stood out to me:

BP CEO has no idea what the software he paid for does

Watch as the BP CEO in the same sentence both gushes about how amazing Palantir is while revealing he doesn’t even know what the product does (or what it’s called).

This causal chain- retail intrigue, followed by a quickly ascending stock price, followed by C-level intrigue, followed by actual purchase agreements is George Soros’ theory of reflexivity in practice. The rise in the stock price brought about interest that culminated in purchase orders which resulted in better earnings which- you guessed it- resulted in a higher stock price. In a miraculous positive feedback loop, a higher stock price caused better earnings and a better stock price.

Reality is an illusion, albeit a persistent one.
-Albert Einstein

To remain bearish and short this stock for so long through such a powerful bull market requires extraordinary conviction or denial, depending on your view. However, as someone who knows a thing or two about this industry, the fact cannot escape me that this company has no real differentiator besides the cultish retail following. I believe that the C-level intrigue is very ephemeral and if either Palantir fails to deliver on its promises (which they no doubt are) or just as likely, new entrants come along to steal the limelight, the sales will go right back down again along with the interest in the stock.

Timing these things is hard, but I think that nearly four years into this cycle and with the overall market starting to look shakier, that the bubble is in the early stages of bursting. There will no doubt be massive countertrend rallies along the way, but I think that this stock will eventually trade back down to the low double-digits. Yes, I believe it’s that overvalued.

Collateral Damage

Enterprise software companies tend to play follow the leader. When one company has a positive narrative emerge and the stock outperforms, its competitors move to replicate the narrative. Because software changes can be made very quickly, pivoting to a new angle and feature set is much faster and lighter than virtually any other industry. Because of this, Palantir’s gimmicks have created an enormous amount of upheaval across the enterprise software industry.

For one thing, multiple SaaS companies are now shifting to an FDE model. To me this is basically just building out consulting orgs within the go to market team, something Oracle and IBM have been doing for about 45 years. I expect these sorts of shifts to reverse as Palantir comes back down to earth. It’s anyone’s guess what narrative will emerge in its place, and that will be particularly interesting to follow if companies start to lose interest in AI as well.

In Closing

Earlier I said that the interview with Bob Dudley was what convinced me that this stock was in a bubble. That’s not totally honest. I’ve actually witnessed many similar occurrences in which Alex Karp himself can’t even describe what they do. As Lavar Burton used to say, “Don’t take my word for it.”

This clip is particluarly funny to me. Watch as Steve Eisman starts to express common sense and two permabull clowns attempt to explain what Karp is saying and proceed to make absolutely no sense themselves:

There’s an episode of Bill Maher where Maher is interviewing Karp and asks him point blank “but what does Palantir do?” It’s very obvious Karp is uncomfortable and does not give a straight answer despite continued prying by Maher. I think both of these exchanges- Maher and Eisman- are very revealing in that you have two people who don’t pretend to be for or against Palantir admit they have no idea what the CEO is talking about or what the company does. These to me are all tell-tale signs of a bubble. There’s no question in my mind that it’s a bubble, the only thing up for debate is when it ends.