Palantir: Not Selling a Single Share.
Q3 2024 ER Digest
Edited by Brian Birnbaum and an update of my original Palantir deep dive.
Exponential trends tend to defy common sense. They make little sense at the beginning when progress is scarcely visible and even less sense down the line, when progress is staggering.
Palantir’s operating margin turned positive for the first time in Q1 2023, coming in at 0.78%. In Q3 2024 operating margin came in at 15.59%, up from 7.16% in the same period last year. We are witnessing an exponentially rising operating margin driven by rapid productization of Palantir’s digital twins. Palantir has been cultivating digital twin supremacy for decades but is only now starting to productize. With every increment comes a non-linear rise in operating margin–and there’s no limit to how much Palantir can productise over time.
Those of us who invested early in Palantir understood, one, that digital twins were set to become the epicenter of capitalism and, secondly, that Palantir’s digital twins were second to none. Although the market is currently euphoric, these two observations remain true. Decades of compounding the quality and efficiency of its digital twins lie ahead for Palantir. I believe these twins will become their customers’ most valuable assets. The rest of the market is only starting to realize their importance, and hypothetical competitors are years behind.
Generational wealth is created by leaning into the pessimism and not only holding but continuing to buy. It can be even harder to hold when stocks rise as opposed to when they fall. This is especially true in tech. Competitive dynamics are often blurry. I’m always looking five years out, at minimum, and staying close to the fundamentals.
Five years from now I believe Palantir’s offerings will be even easier to deploy and more indispensable than ever. By 2030 I see far wider operating margins and operational scale. Although Palantir currently trades at just over 56 times sales, if indeed my assessment of Palantir’s competitive positioning and the relevance of digital twins is correct, we will look back and wonder how the stock could ever have been bought so cheaply on the open market.
In my original deep dive, I explained that Palantir would become acash machine the day it cracked the code on frictionless distribution. To date, Palantir has exceeded my expectations due to a culture better than I could have imagined.
The main takeaway from the more than 50 deep dives that I’ve done on (mostly) world class companies is that over the long term, stock prices track culture. Companies are just a collection of individuals working together and the culture they share broadly determines their fate, just like personality determines that of an individual. The best evidence of this is the proverb “go woke, go broke.” Perhaps because of his eccentricity, Alex Karp seems to be an even better custodian of culture than I first estimated. And so long as Palantir’s culture remains world-class, the company’s free cash flow per share levels will likely continue trending up.
Alex Karp’s words during the Q3 2024 earnings call are food for thought:
That the financials of Palantir would flow from our products and our culture and our way of implementing that we would bring violence and death to our enemies, while making targeting and general issues of safety better for our allies and for Americans, that we would stand by our values in thick and thin, including that the west and America are superior ways of organising and that this is a great country and historically anomalous in its greatness and that we would build a company with the best people from all over the world, but primarily from America to power America and its allies.
Exponential curves result from countless accumulated increments. And thus, so long as we witness the improvements, however small they may be, and though success is never guaranteed, the opportunity cost of selling during any period of the exponential process should neutralize any desire to avoid temporary drawdowns. If we stay aboard and crash we lose 100% of our invested capital–but if we jump out of the rocketship, we risk losing far more.
Decades from now it will be well understood that the worst mistake in investing is selling a winner early. This is understood by some at present, but early in this dawning age of networks and exponential curves, a small minority of our picks will tend to yield a vast majority of our wins.
Until next time!
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