Palantir Q1 2023 ER Digest

Update

Edited by Brian Birnbaum and an update of my original Palantir deep dive.

A company with a bottom line that hovers around 0 and with positive free cashflow is often the product of design. Palantir’s profitability sends a good message to stakeholders - after all, who wants to embed a product into their core of their operations without knowing for sure that the provider is going to be around for a long time? However, this quarter´s (GAAP) profitability is rather anomalous:

1. revenue is up 39% sequentially,

2. but only up 24% if you exclude revenue from SPACs.

This is not the sort of profitability that I like to see, but it does serve an aesthetic function and management expects to be profitable going forward. The point is that, although the business is now looking shinier because of the profitability, we are still dealing with fundamentally the same business.

The launch of AIP is a natural extension of Palantir´s core value. Palantir is already dedicated to making sense of data and feeding it to AI models programatically is a consistent move, that I have been expecting for some time. When I wrote my original Palantir thesis, many asked me how I knew that it would play a key role in AI when management never even talked about it. I sure did not do a DCF analysis to figure it out, but rather spent years playing with Pytorch.

“BP, our customer of over a decade, recently shared that Foundry helped them reduce production cost by approximately 60% from $14 a barrel to less than $6 a barrel.” - Ryan Taylor @ Q1 2023 ER.

The above excerpt from the conference call refers to a case that is identical to the hypothetical one I used in the deep dive to illustrate the power of digital twins and is also hard to believe. Therefore, I went looking for the data to support this statement and found the following:

“As far as your second question, OpEx and the upstream, you have to think about this really as it has a 10-year journey that the Upstream has been on. You'll remember that we heavily, heavily started to digitize years ago. And the work of all of that, along with reorganization that occurred to move to a much more central model with Agile Squad is really starting to pay off. I think the number was $14 a barrel. Lifting costs back in 2012 or 2013, and we're all the way to sub-6 now and aspiring to hold that moving forward. That's really about the fact that we spent years and years and years streamlining all our data, thanks to help from Palantir, a great partner we have.” - Murray Auchincloss, BP CFO @ Q1 2023.

In the oil industry, upstream operations are those concerned with exploration and production activities. In other words, BP goes out into the world to find oil wells and produce oil barrels and over the last decade, it seems that Palantir has enabled BP to reduce the cost per barrel meaningfully. During this time, BP´s gross margin has been trending up rather steadily (factoring out the last couple of inflationary years, which have no doubt greatly aided BP´s financial metrics), so there is indeed a strong correlation between the remarks of the two companies and the evolution of BP´s financial statements.

I assume BP is happy with the software and is currently not very tempted to get rid of it. When I analyze the evolution of Palantir´s business, I keep in mind the point that the BP case makes: Palantir´s software is really powerful and can radically decrease OPEX as a % of revenue in very complex operations. Naturally, as we go through the downturn everyone is suffering from paralysis. Stock market investors are scared, just like the people that make purchasing decisions at organizations: so it is unreasonable to expect Palantir to grow very fast during this time.

I wanted to finish off this digest by taking you on a quick tour of Fairchild Semiconductor´s rise and fall. Founded in 1957, Fairchild was one of the pioneering companies in the semiconductor industry and was hugely influential in the creation of what we now know as Silicon Valley. It is no longer around, because eight key employees (including Robert Noyce and Gordon Moore) left the company, since the owners did not give them stock options. Soon after, it became irrelevant.

Noyce and Moore went on to found Intel (deep dive) and the rest is history. The morale of the story is that talent made Fairchild Semiconductors, but the firm was not able to retain it. Palantir´s SBC is a controversial issue which concerns me too, but I believe that digital twins today require a similar talent density to that which semiconductors has required in the past. Nonetheless, shareholders must be cared for too: it will be a fine balance to strike.

---

⚡ 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.