Palantir Today is Microsoft in 1993

Various Mental Models

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Edited by Brian Birnbaum

Palantir is executing the same playbook Microsoft has executed over the past few decades. The results are likely to be as spectacular or more.

Microsoft’s success over the past few decades has been the result of dominating at the operating system level and then leveraging said dominance to build an ecosystem of solutions. The latter has not only enabled Microsoft to multiply its operating leverage, but also fortify its moat at the operating system level. This dynamic, with its up and downs along the way, has seen Microsoft’s market capitalisation go from $777M at IPO to $3.21T to date - an incredible 4,168X return.

While the market is enthused with Palantir’s rising operating margins and many discuss whether the company is overvalued or not, I remain focused on the deeper fundamentals. Palantir is doing exactly what Microsoft has done over the last few decades but, in technical terms, at a lower level. Indeed, Microsoft owns the operating system of the machines people use to do work, but Palantir now owns the operating system that runs the entire enterprise.

The Enterprise Stack, as depicted above, simply aggregates the data that employees generate via their personal computing devices and returns outputs, in the form of insights that unlock value. Previously, the layer in between computing devices and hardware was occupied by disparate softwares that essentially attempted to do what digital twins do today - make sense out of vast amounts of data silos. With the advent of AI, digital twins are now an essential component of the Enterprise Stack and Palantir is the world's leading provider.

Until recently, Palantir was a clunky SaaS (software as a service provider), with relatively high deployment costs and long sales cycles. Thanks to their AIP (Artificial Intelligence Platform) initiative, deployment times and costs are rapidly collapsing, with sales cycles shrinking accordingly. This is ultimately driving the aforementioned increase in operating margins, but is fundamentally productising the offerings to the point where they are becoming a platform.

The above means that Palantir’s offerings are becoming gradually more affordable and feasible for small and medium enterprises. As a result, Palantir’s commercial US business is growing at lightning speed, as you can see in the graph below, with quarterly revenue up 54% YoY. Therefore, while Microsoft continues to diversify its efforts across a broad range of applications within and around its higher level operating system, Palantir is positioning itself to become the leading enterprise digital twin and thus, the bedrock of the Enterprise Stack.

Digital twins are now the bedrock of the stack because they’re the only way we can deploy AI across the enterprise and make money. Companies are essentially optimisation functions, in that their primary goal is to minimise inputs and maximise outputs per share, for as long as possible. To do this, human kind has traditionally processed information manually and missed out on an incalculable volume of insights. With AI, we can just plug data into it and automate much of the work - so long as we have a truly functional digital twin.

Further, large language models have given rise to generative search methods, which are superior to traditional retrieval methods in that they increase the efficiency with which the Enterprise Stack converts input into insights. I believe that at some point in the coming decade, generative methods will be as indispensable as electricity is at present and this will, by itself, funnel tremendous wealth to the primary provider of digital twins.

At that point, however, business applications like Microsoft Word and Excel will still be important, but only if they integrate with an ontology. Without it, they're like the printing press; with it, they empower each employee even more than at present. Beyond this point, business applications without an ontology become increasingly irrelevant in a competitive context, placing Palantir at the top of the enterprise funnel. In such a scenario, Palantir’s operating system would come to subjugate Microsoft’s ecosystem.

My experience is that, when everyone is enthused with a given growth stock, it’s likely that it will soon drop over 50% for no particular reason - such is the natural rhythm of the market. However, so long as the underlying company continues to evolve well, fundamentally speaking, holding onto the stock tends to pay off over the long term. The productisation of Palantir’s offerings is not only paving the way for the scenario that I describe above, but also for Palantir to evolve into a network of ontologies. Said development can, over the long term, increase Palantir’s market capitalisation by orders of magnitude.

As Palantir continues to productise its offerings, it gains more customers per industry. This then positions Palantir to evolve from a provider of digital twins to a network that connects digital twins and facilitates interactions between players within and across industries. If indeed Palantir does achieve dominance in the Enterprise Stack as I hypothesise above, this is the path for the company to exponentiate its operating leverage and make far more money per digital twin deployed than at present.

The above would be the equivalent to Microsoft launching its office software products, for example, leveraging its ever-growing operating system installed base. While this future is far ahead, the odds of the above happening are meaningful so long as Palantir’s culture remains top notch. In my studies of long term winners, I have found that financials tend to track culture over the long term. We will see this once more in my upcoming Costco deep dive, which I am currently working on.

Until next time!

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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.