Hims and Palantir Are Still Cheap.
Various Mental Abstractions
Edited by Brian Birnbaum.
In the age of parabolic inflections, selling a winner early is the most costly mistake, shunting investors onto the fast-track to underperformance.
Hims and Palantir are excellent examples.
Success in the stock market is counterintuitive in that it repeatedly requires investors to act against their emotions in order to succeed. We all know that we should be buying stocks when no one wants them, but in practice this is nearly impossible for most. It’s even harder for investors to hold onto stocks when prices rise quickly, as is the case with Hims and Palantir. The extreme fear of giving back an astronomical annualized gain keeps 99% of investors from holding onto stocks for long periods of time–despite that only by holding can generational wealth be made.
The emotional intensity is amplified by the excruciatingly long time horizons. Although stocks can move quickly, when they correct they may not recover for years, and corrections happen often enough to bore people out of their holdings. When stocks rise, they may do so for months on end with no signs of correcting. Indeed, investors do not just experience extreme fear for a brief moment–they do so for brutally long periods of time, with even the most psychologically prepared susceptible to letting down their guard just long enough to sell. The pain is further magnified by the procyclical nature of traditional analysts, which rather predictably urge investors to act on their fear and other primitive emotions.
The antidote to the above is understanding that over the long term stock prices track free cash flow per share. As Jeff Bezos said, investors can’t spend percentage margins but they can spend free cash flow. The value of a share is a direct function of how much cash it produces for its owner. While the stock market is an unpredictable and chaotic system, businesses are less so. Extraordinary business analysts spot companies highly likely to grow free cash flow per share and thus outpace their current valuations over the long term.
While such companies are rare, a portfolio of them is as close as an investor can get to certainty in the stock market. As Buffett says, in the short term the stock market is a voting machine, but over the long term it’s a weighing machine. There’s no guessing what will happen to the prices of your stocks over the short term, but so long as the underlying companies increase their free cash flow per share your stocks will do just fine over the long term. Over a sufficiently long time horizon, a few of your picks will in turn deliver most of your returns. For instance, Spotify and Palantir have each–on their own–returned the value of my entire portfolio at the time of their purchase–and it’s just the beginning.
Hims trades at just over 10 times sales, while Palantir at over 100 times sales. While these are materially different valuation multiples, the underlying concern remains the same: investors will make money if free cash flow per share grows more than the market is currently discounting. Traditional analysts tend to cast shadows over Palantir shares due to the lofty valuation. Despite all the current hand-wringing, investors will turn out just fine years from now so long as Palantir continues compounding free cash flow per share, as I believe it will. Hims stock has some way to go before giving investors such a happy headache–but it’s on its way.
On top of the inherent difficulty of navigating the stock market, what confuses contemporaneous investors most is the increasingly pervasive winner-takes-all dynamic. The economy is evolving into a collection of networks, with a select number of companies taking their entire respective markets. In turn, the value creation process has been distorted. Snowballing value remains for long periods of time invisible to the untrained eye before rearing its head in the financials. The elongated S-curve and ensuing rapid multiple expansion confounds traditional analysts. Networks have pushed us into the age of exponentials.
Just because a stock price discounts exponential growth, as does Palantir’s, it doesn’t mean that exponential growth will happen. However, in a portfolio of companies with the greatest potential for such kind of growth, at least a few of them will likely achieve it, whereas, in a winner-takes-all economy, the rest of your picks will tend to go to zero over time. Because it’s so difficult to predict which of these world-class companies will sustain their growth, selling a stock as soon as the market starts to discount such is a terrible mistake.
It’s the path to remarkable underperformance. By selling your prospective winners, you greatly increase the odds of being left with only mediocre companies in your portfolio–the ones whose growth is never discounted in the first place.
Valuation is a paramount consideration when making an investment. I’ve made all of my money by buying extraordinary companies at depressed prices, which I define on average as under four times price/sales. However, buying a company on the outside looking, simply because it’s at a reasonable price, is futile. In the modern economy, buying the right company is significantly more important than the price it’s bought at. Indeed, many highly intelligent individuals thought that Palantir and Spotify stocks were terribly expensive when I bought them at $7 and $97.50, respectively.
I bought these stocks because I saw limitless potential for free cash flow per share growth and high odds of success, which is starting to materialize, per the graphs below. The valuations of these two companies are now considerably higher, with my Palantir investment being up 15X and Spotify being up over 6X. Indeed, their ability to innovate and enhance their earning power has led them to rapidly outpace their valuations from a few years ago. In turn, I believe that so long as their culture remains world-class, the odds of this happening again over the coming five years are meaningful.
As you can see below, Hims’ free cash flow per share is also increasing exponentially, which is the main driver of its stellar stock price. When I bought Hims I didn’t focus on its valuation as much as I focused on its ability to drive free cash flow per share. Valuation is generally a loser’s game in that if you have to spend too much time thinking about it, the prospects are obviously too thin. This is especially so in tech, where it’s possible to identify with high probability companies that will dominate their industry, sector, or vertical.
I continue to hold Spotify, Palantir, and Hims because I see the path for them to increase their free cash flow per share levels by orders of magnitude over the long term. Whether they’re “overvalued” at any given point in time is of little to no concern. As Buffett says, I’d rather be directionally correct than precisely wrong. Such sentiment allows us to understand why the Oracle found so much amusement over investors’ obsession over valuation and DCF calculations.
With my original investment up over 4X, Hims is a perfect instance of the mental framework that I teach in myTech Stock Goldmine course. I wouldn’t have found it if I hadn’t sat down to create my course, which enabled me to identify the opportunity with immense clarity. The same mental framework lies behind my 25X+ AMD and Tesla investments and my aforementioned 15X+ Palantir and 6X+ Spotify picks. Hundreds of happy students have taken and attested to my course. Click the link below for lifetime access at just $350.
Until next time!
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