Hello folks. Beliefs and high expectations for a stock can affect the valuation of a stock. A good example is $PLTR because of my belief in a bright future for AI software platforms and for the business model of Palantir. The parameters of my narrative are the following:

I found a value per share at 19$ and I thought " Ok, Palantir is undervalued by 30% and I accept the price that the market offers me".

Before closing my valuation spreadsheet I looked again at my valuation and specifically the parameters on Terminal year (the value for perpetuity) which was:

When I attached the value of 22% in ROIC perpetuity it was like to assume that Palantir will have a competitive advantage forever which is a HUGE assumption in valuation. To illustrate an example, I have assumed that Palantir will be like Coca-Cola but in the Software sector, or Walmart in the retailing sector. When I changed ROIC to 8%, which is the average for most global companies, my valuation suddenly droped at 13$ per share.

Closing Thoughts

Beliefs are one of the worst enemies in valuation because we are starting to have subjective views for a stock. Furthermore, my example comes in contrast with the theory of the circle of competence that has been proposed by Warrent Buffett because the more you investigate a stock, more likely is to gain a subjective view that will affect negative the results.

If someone belives that Palantir will keep his competitive advantage for perpetuity then the market price is a good offer for him. On the other hand, if someone believes that Palnatir will become a typical global company then company has reached for good the overvalued levels.

Below it is my newsletter on $PLTR. Thank you!