Palantir: Exponential Growth Ahead.

Q2 2024 Update

Today we’re celebrating 30K deep divers on X and 3K on Youtube! Thank you all for being a part of this. Today I’m happy to bring you my latest update on Palantir, one of my boldest bets ever. Enjoy!

Edited by Brian Birnbaum

At a price to sales ratio of 33, the market is pricing in exponential growth for Palantir. What follows now is an in-depth review of the mechanisms that are likely to yield said exponential growth.

As I have been anticipating for years, Palantir’s financials are rapidly improving as a result of their unit economics getting better. Better unit economics are driven by the company productizing its offerings and essentially decreasing time to value for customers. Palantir’s products are now easier to sell and install, which is driving more business and higher profits, as you can see in the graph below. 

The rule of 40 is a financial metric used primarily in the technology and software as a service (SaaS) sectors to evaluate the balance between growth and profitability, and thus serves as a good summary of a company’s earning power. To calculate the rule of 40 score, one adds revenue growth rate and profit margin–eponymously, if these metrics add to 40 or above, odds are good that the company in question possesses competitive advantages and a strong growth runway. As we can see below, Palantir’s score has blasted beyond 40 for some time now. 

Palantir’s score is rising fast because its digital twins are years ahead of market competitors. As they become easier to deploy, their customers not only want, but at a certain level of market saturation will need them to compete in their respective industries and sectors–if not, eventually, the marketplace as a whole.

For the past few quarters, much of the company’s focus has gone into accelerating the creation of prototypes via AIP Bootcamps. Customer acquisition has accelerated as a result, per the graph below, which shows Palantir’s customer additions per quarter rising speedily since Q1 2023. However, per management’s comments during the Q2 2024 earnings call, Palantir is now specifically focused on decreasing the time from prototype to production.

As in, going from small experiments in the bootcamps to full scale implementations of digital twins.

Palantir’s Customer Additions per Quarter

OpEx is expected to rise in H2 2024 as the company invests in building out these efficiencies, which are likely to increase average revenue per customer not only through accelerated product cycles but iteration as well. Thus, over the coming few quarters we are likely to see a further acceleration of customer acquisition and of financial metrics across the board. Here’s what Palantir CFO Dave Glazer said about this during the Q2 earnings call: 

We continue to expect the expenses to ramp through the back half of the year as we invest in the product pipeline and hard technical problems in debottlenecking the journey from prototype to production that Shyam just outlined.

And here’s what CFO Ryan Taylor said about the matter: 

That being said, it was -- as Shyam was highlighting, what everyone underestimates is the immense challenge of deploying enterprise production AI software at scale. And so we're very much focusing our energy and going deep in production with those customers and that's the massive opportunity before us and that's where we're running at full speed.

In my view, Palantir’s current price to sales ratio of just over 33 is the market trying to price in the network effects that are likely to emerge from Palantir’s ongoing productization. As Palantir continues to make its offerings easier to deploy, the company is evolving into a platform upon which the marketplace will build its companies. Down this path, Palantir is likely to brew an (exponentially) growing ecosystem of companies that interact with each other on the platform.

Over the coming five years we are going to see Palantir evolve from a provider of digital twins to a platform that connects many digital twins to each other, thus facilitating transactions along and across supply chains. This promises to increase operating leverage exponentially and thus yield much better financials than at present. I’ve discussed this many times on X.

While the idea was too abstract for most, we now have concrete examples of actions that Palantir is taking in anticipation of this development. In Q2 Palantir announced a new offering called Warp Speed, which is essentially an operating system designed to increase manufacturing efficiency for customers. Warp Speed is the first example of a repeatable computing blueprint emerging from Palantir’s platform that customers can access in order to enhance their manufacturing operations, regardless of their industry. 

During the Q2 earnings call, CTO Shyam Sankar defined it as the “modern American manufacturing operating system”: 

And finally, fresh out of the AIP product pipeline, we are launching a new offering, Warp Speed, to power American re-industrialization. The software playbooks have also failed in manufacturing. And all the founders driving reindustrialization know it. This is why SpaceX built their own ERP.

[…]

Warp Speed, built on AIP, on our industrial AI, and with ontology is the modern American manufacturing operating system that reimagines how to bend atoms better with bits. 

Palantir can launch instances of valuable compute that increase the efficiency of any activity its customers engage in, repeatedly. The number of options here is fairly limitless–especially as Palantir evolves into a network of ontologies. Over the coming few years, as Palantir continues to focus on productization, and the valuable compute component of the business rears its head, I believe we will see much stronger financials emerge. 

Last but not least, the SP500 inclusion is a notable milestone in my journey as a Palantir shareholder. It’s a moment of validation for an unapologetic culture that both yields tremendous products and has a tendency to upset the establishment. The latter has translated into analysts in traditional institutions forsaking Palantir’s competitive advantage. And now the inclusion in the index marks a new chapter for the thesis–likely one of broader acceptance.

Until next time!

---

⚡ If you enjoyed the post, please feel free to share with friends, drop a like and leave me a comment.

You can also reach me at:

Twitter: @alc2022

LinkedIn: antoniolinaresc

Disclosure

These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.