Palantir: The Western Operating System.
Q4 2024 Update
Edited by Brian Birnbaum and an update of my original Palantir deep dive.
As of Q4 2024 and as I predicted, Palantir is visibly becoming an operating system. This promises to further exponentiate revenue and margins.
Over the long term, this sets Palantir on a course to become a platform that powers the entire (Western) economy. Like electricity today.
Palantir is now manifestly becoming an operating system, with Anduril obtaining a 200X efficiency gain in their ability to manage supply chain shortages via Warp Speed in Q4 2024. The latter is a productised version of Palantir’s digital twins, designed to help companies get much more efficient at manufacturing. In effect, the Anduril case is a taste of things to come: we are now going to see multiple operating systems emerge from Palantir’s digital twins, exponentiating Palantir’s earning power in a relatively short time.
In Q4, we also announced the customers in the inaugural Warp Speed cohort, which are using Palantir's Warp Speed to gain an advantage in aspects of their manufacturing operating system, including automated visual quality inspections and dynamic production scheduling.
Anduril CIO, Tom Bosco, noted “by using the software, we've seen up to 200x efficiency gain in our ability to anticipate and respond to supply shortages”.
-Ryan Taylor, Palantir CRO during the Q4 2024 earnings call.
Once Palantir instantiates an operating system with a specific function, they can scale it all across the economy at a marginal cost. After Anduril obtains a 200X efficiency increase via Warp Speed, for example, the cost of delivering similar value to any other company with manufacturing operations is close to zero. The implications of this dynamic are threefold for Palantir: much more efficient distribution, far higher margins and an exponentially higher revenue per customer over time.
This is likely to exponentiate Palantir’s free cash flow per share going forward, which you can see depicted in the graph below (red line). The increment from 2020 levels has been primarily driven by Palantir productising its digital twins, making them far easier to deploy and use. This has improved unit economics, enhancing Palantir’s ability to produce cash which is further evidenced by the rapidly rising cash from operations (blue line).
The shift towards becoming a series of operating systems simply adds inconceivable fuel to the fire.
This shift is well illustrated by the rapid progress of Palantir’s Rule of 40 score, which came in at 81% in Q4 2024. According to this rule, which is widely used in the SaaS industry, the sum of a company's revenue growth rate and adjusted operating margin should exceed 40%. Palantir’s score is indicative of an exceptional situation: the combination of extraordinary demand and an unusual ability to scale profitably. For example, Palantir’s Rule of 40 score is now twice that of ServiceNow, Shopify and Salesforce and 58% higher than Adobe’s.
The graph below displays the Rule of 40 for publicly traded SaaS companies. You can see how scoring above 50 is exceptional, with the vast majority scoring under 40. The contrast with Palantir’s rapidly rising score (which wouldn’t fit in the graph) best evidences the extraordinary fundamental properties of Palantir’s business.
The Q4 2024 earnings call is thus a gratifying moment, since I’ve been saying for a long time that Palantir was evolving into an operating system. In my original Palantir deep dive I said the following (written in March 2022):
There is a strong flywheel forming here. As Palantir continues to onboard customers from different industries (50 and counting, per their latest 10-K), it gets better at providing valuable compute to each industry. For instance, the more clients it deals with in the healthcare space, the better it gets at providing customers in that industry with computation that is directly relevant to their goals.
As the two KPIs that I explore in section 6 continue to progress, this flywheel is likely to have Palantir acting as gatekeeper in the cloud computing space. In 10 years time, it may be common practice to build a company starting with the digital twin first, much like is the case with websites today. Buying raw compute will likely seem sub-optimal, to say the least.
The second derivative effect of this is that we will end up seeing entire industries running on Palantir´s software. This is quite clear when looking at Skywise, for instance. Down the line, this can have Palantir not only making a lot of money, but being quite powerful, Google / Alphabet style.
Thus, I believe that the shift towards becoming a series of operating systems doesn’t just exponentiate the ease of deployment. It ultimately turns Palantir into a platform that powers the entire (Western) economy, as electricity does today. After the efficiency gains obtained in Q4 2024, switching Warp Speed off is likely not an option for Anduril. As this happens across a growing range of verticals across the economy, we are likely to see Palantir evolving into a provider of vertical Ontologies.
With the onset of AI, whoever has the most and highest quality data can train the most competitive AI models. The value is therefore not in the models, but rather in the data and in the underlying infrastructure that enables its adequate management. As Palantir creates operating systems for subsequent verticals beyond manufacturing, they become the key infrastructure provider for any participant within that vertical. For these participants, switching Palantir off means instantly ceasing to be competitive.
This is also why I believe Palantir is actually a robotics company and why Tesla’s humanoid robots will have to plug into its vertical Ontologies in order to be truly productive. Taking the Anduril example, a collection of 100 humanoid robots wouldn’t know how to truly deliver value in their manufacturing operations without running on Warp Speed. The latter gives them all the context (data) required for them to make manufacturing more efficient.
The robots will come with a generalised ability to navigate three dimensional space, but they’re simply not useful at a manufacturing facility unless they’re plugged into its digital twin. This will happen across verticals throughout the economy, which will likely have Palantir and Tesla become competitors over time.
In the graph below, you can see a depiction of what I believe the economy will evolve into. A collection of horizontal Ontologies that will interact with the world via vertical Ontologies - or as I call it, the Ontology Grid.
Take autonomy, for example—it’s a horizontal force, cutting across industries. It marks a fundamental leap in our ability to convert processed information into direct action. Once Tesla refines an AI capable of independently navigating three-dimensional space, that intelligence can be deployed globally through an API at near-zero marginal cost. But for autonomy to be truly effective in specific fields like healthcare or construction, the AI must be further trained on domain-specific datasets. This is where Palantir’s vertical Ontologies come into play.
By equipping companies across an expanding array of industries with digital twins, Palantir is, in effect, constructing fully realised digital replicas of entire sectors. These digital twins hold the specialised data that will teach an autonomy AI to perform surgeries, construct buildings, or even engage in combat. The Ontology Grid is on a course to automate any task that can be systematised.
The Ontology Grid is quietly enclosing businesses—and the grip is tightening. Just as the internet reshaped the economy by centralising power within a few key intermediaries, Ontology infrastructure is poised to systematically commoditise an ever-growing share of business operations. As it ingests data at an exponential rate, the competitive advantage of companies not plugged into this grid will steadily erode.
On the other side of the equation, Palantir is set to grow orders of magnitude from here over the long term. In the meantime, the thesis continues to be de-risked every quarter as Palantir strengthens its balance sheet, as you can see depicted in the graph below. Total cash and short term investments (red line, left axis) is an order of magnitude higher than total debt (blue line, right axis) and growing.
Until next time!
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since the first time I have started following you, after watching 10AMPro, I just get a bunch of powerful insights, thanks a lot for sharing. Would you mind to research the links between PLTR and Stellar Lumens Foundation?