Quick All Access Trade SSSS Call Options

Hey Subscriber,

Quick trade idea here on Palantir and NextDoor IPOs. 

SSSS is the ticker symbol for SuRo Capital (a closed end BDC) that is trading at a 15% discount to intrinsic value if Palantir prices at $22 billion on Wednesday morning The thesis here is that SSSS is a way to play the Palantir IPO (PLTR) and for retail to actually get a piece of the pop (if any). There is an asymmetric risk/reward for the stock that trades at a 15% discount to NAV if Palantir actually prices at $22 billion.

SuRo Management has previously indicated that they are holding Palantir at a $12 billion fair value. If Palantir prices at $22 billion and no change happens on the first day, that implies 83% upside to SSSS fair value. Taking into account that Palantir constitutes 15% of the SSSS portfolio, that implies 27.5% upside from the current NAV of $11.84 if you hold all other investments at par. That would imply a price target of $15/share for SSSS.

Source: SSSS IR

Risk/Reward

With SSSS trading at $12.88 right now, that implies 15% upside. If Palantir slides back down to a $12 billion valuation on the IPO date, that would imply 9% downside. Given the recent history of technology IPOs to date, that type of slide (50% downside from IPO) is not something we can expect.

However, Palantir is a more hotly debated IPO and going direct will provide less technical support to the stock on IPO day. This also does not consider the upside case that Palantir actually pops a little on the day.

Palantir is growing ~42% in 2020 to $1.055 billion and is losing a ton of money. We can see the recent guidance update as of September 22 in the filing below.

Source: Palantir 8-K

Looking at comps that are growing in the 30% range for the next 12 months, we can apply a median multiple to understand where Palantir will fit in. We can see that the rough EV/NTM S multiple would be the mid-20s, with the exception of Slack (WORK) which is trading at 14x dragged down on competitive issues with Microsoft (MSFT).

Source: Meritech

Assuming at 25x EV/NTM S for Palantir, we can see a valuation case for $25 billion on the upside, $22 billion (flat no pop) as the base case, and $14 billion as the downside case (Slack's multiple).

Given the recent environment, I believe it is fair to assign probabilities of 50%/30%/20% to those cases. That gives us a probabilistic weighted EV/NTM S multiple of 22.

Funny enough, that is exactly where the IPO is landing at $22 billion. I don't think that's a coincidence.

With this $22 billion, we see a 15% upside from today's prices, and this actually incorporates the downside case of the stock really dropping on the first day. Looking at it from an IRR perspective, seeing that pop within 2 days of trading is great and a sophisticated way to play into Palantir.

Finally, this investment thesis does not include upside from names like Nextdoor (going public via SPAC in November) and Course Hero (high on all SPAC players buy list) that may imply further upside on a longer-term basis. It also does not include notes on the share repurchase program.

Source: SSSS IR

Either BUY SSSS outright under $13 or 11/20 $15 Calls 

SSSS 11/20/2020 15.00 C

Action	Quantity	Price	Timing	Time & Date (ET)
Buy Calls to Open	5 Contracts	Limit $1.10	Day Only

Toby