Why Are Ewe Reading This Now?

Suddenly the language of passive is everywhere

Summary:

• The narrative reveals how companies like Palantir and MicroStrategy strategically exploit passive investing dynamics, potentially inflating valuations and enabling insider exits

• Broader debates on the true market impact of passive investing remain unresolved as the research presented by market participants is designed to benefit their individual objectives rather than uncovering “truth.”

• None of this should be a surprise — it’s still not too late, but time is growing short to avoid a generational event

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Top Comment

tchampion had raised a salient question on “A Mixed Performance” that I promised to devote a note too: Thank you Mike! All great points. Would love to understand how two other forces are influencing the picture.

1/ How is the behavior of company executives reacting to passive? Is your "shares outstanding are relatively constant" statement true? I believe silicon valley public companies have been masterful at using passive to their advantage. High "real" cash flow generators can use passive buying as a turbocharger to their stock price (a la Einhorn) and "fake" cash flow generators are able to cream the passive crowd by moving a lot of compensation from cash to equity.

2/ Whats the effect of the growth of private equity capital over the long term? Does it systematically skew public markets towards more speculative companies as the more "stable" companies go increasingly private? Exceptions could be regulated companies, foreign issuers (different passive dynamics), etc.

With the combination of the above two points (and possibly others), can we compare the PE ratios and other statistics of 30 years ago to today's markets? And if that is true, is passive fundamentally changing the public market to be a liquidity allocation mechanism as opposed to a capital allocation mechanism?

MWG: This one’s for you, TC

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The Main Event

On November 15, 2024 the veil of silence was lifted as Alex Moore, a 41 year-old board member of Palantir celebrated the move of PLTR stock to the Nasdaq from the NYSE with a tweet he immediately deleted, along with his entire Twitter account.

Or, in slightly more officious tones:

This wasn’t even the first tweet from Austin celebrating the inclusion of Palantir into an index…

So why the panic deletion? Oh… perhaps it was the OTHER part of the statement… “Everything we do is to reward and support our retail diamondhands following.” The SEC might look unfavorably upon a non-Elon Musk board member making such statements while dumping roughly half their shares at 1/3rd the current average price:

Good luck, Alex.

Now, Palantir is a very special child in the equity markets because it has played the passive game perfectly… almost as if it had the playbook:

1. Direct listing, not IPO — this allowed Palantir to get public at a sufficient size that they almost immediately became eligible for index inclusion. Had they done a traditional IPO, they would have been forced to find active manager underwriting shareholders capable of holding shares through index inclusion. By listing directly, they became eligible for “Fast Track” status and Vanguard was forced to begin buying 5 days after the listing. As insiders sold shares, the “effective float” rose (requiring extra purchases from index providers) and Palantir insiders were able to exit:

2. Listing a few months before US elections has provided notable fuel for purchases as political uncertainty has resolved. In 2020, this was still a novel concept. By 2024, it was expected (and hence less valuable).

3. Financing customer growth by investing roughly $450MM in over two dozen SPACs — which in turn used the money to purchase Palantir services. This program was abandoned after CRSP changed the rules on SPAC index inclusion, but per the disclosures these programs must have generated at least $450MM in customer revenues in the commercial segment, or roughly 1/3rd of all commercial sales over the effective time period. At 50x sales, not a bad capital allocation decision. Particularly because those “non-operating losses” generated by funding your customers don’t count against operating income for S&P500 inclusion: