Palantir Finds The Missing Ingredient For Their Secret Sauce (NYSE:PLTR)

What Is the Goal of This Article?

As many of my readers know I am a long-term technology investor and hobbyist writer about stocks, who works full-time in the Software-as-a-Service (SaaS) industry. The first goal of this article is to educate readers on the inflection points I believe Palantir Technologies Inc. (NYSE:PLTR) has reached in their business and why these are important. The more important goal of this article is to share their discovery of what I believe was their missing ingredient for their “secret sauce“ to accelerated long-term growth.

To the common Wall Street investor, Palantir may appear as an enigma, primarily recognized within the niches of government IT and specialized commercial sectors. Yet, this obscurity contradicts the company’s strategic acumen in targeting and securing the most colossal customers in select industries, resolving their most complex issues—a tactical precursor to a broader market permeation. Palantir is on the precipice of a paradigm shift, wielding its proprietary AI as the linchpin in a grand design to set industry standards—a ‘trickle down’ of innovation poised to revolutionize businesses at large. For the perceptive and patient long-term investor, the kind with a horizon spanning 5 to 10 years, Palantir’s stock is not merely an asset; it’s a vote of confidence in a future where data intelligence becomes the cornerstone of enterprise success.

My “strong buy” rating for this stock is not for the fleeting trader, but for the visionary investor seeking to shepherd a stake in the future of AI innovation over the years to come, even through all the volatility. This stock has had a significant run up in 2023 and could keep going or could retrace back to earlier price points. What I am paying attention to is the fundamental shifts in the business, new solutions that will capture new customers, and the transformed GTM strategy of Palantir.

The Latest Quarterly Results

Now let’s quickly dive into the Palantir’s Q3 2023 results, and review their strategic wins and forward-looking initiatives, which I will develop further in the subsequent sections of this article.

Here is a detailed breakdown of Palantir’s Q3 2023 earnings results, along with more highlights in the image below.

• GAAP Net Income: Palantir reported a GAAP net income of $72 million, which equates to a 13% margin, marking the fourth consecutive quarter of GAAP profitability.
• GAAP EPS: Palantir Technologies exceeded earnings expectations with a reported EPS of $0.07, above the expected $0.06​​.
• Large Deals & Industries: Palantir had significant deal closures across various industries. Specifically, they closed 80 deals worth $1 million or more across 30 industries, 29 deals of $5 million or more across 16 industries, and 12 deals of $10 million or more across 11 industries. (Notice the focus on highlighting the number of industries Palantir is winning.)
• Customer Count: A 34% year-over-year growth in customer count indicates expanding market penetration, which is a key focus for investors considering the Acquire, Expand, and Scale business model.
• GAAP Operating Income: Five quarters in a row of continued improvement of operating efficiencies and GAAP operating income. In Q3 2023 Palantir had a 4X sequential improvement in quarterly GAAP Operating Income!

We Are in the Early Innings

Palantir is on pace to generate more than $2.2 Billion in revenue in 2023 and has a market cap of over $40 Billion yet I believe is still in their early innings of their growth potential. In my opinion it is not too late by any means for investors to start dollar cost averaging into Palantir stock. Here are some clear examples that illustrate how early we are in the trajectory of Palantir:

• Palantir’s customer count for all segments together is 453. There are so many different industries, customer types, and enterprises that have not yet been introduced to Palantir.
• Most organizations around the world have not heard of who Palantir is or what solutions they offer. A lot of investors still do not know who Palantir is either, just ask your friend, coworker, or family member if they have heard of Palantir? And they will most likely say “no,” but they know the names of Microsoft (MSFT) and Google (GOOG). Your family and friends may never know the name of Palantir unless they develop a consumer facing product, but I believe in the world of IT Palantir will one day be a household name.
• Palantir has only been a public company for a little over three years, which is also the amount of time the company has started to build out sales teams to sell their solutions. Prior to that it was their CEO, executive leaders, and engineers traveling from customer prospect to prospect.
• Palantir has less than 4,000 employees, with their potential scale and the problems they can solve this number will be dramatically higher years from now.
• Palantir just had their first full year of GAAP profitability.

I believe the moment we are in is like if you invested in Salesforce (CRM) or Tesla (TSLA) when they were a $40 billion dollar market cap company, and today those returns would be massive.

A Foundation Built on Financial Discipline

In the financial realm, discipline is often the unsung hero that strengthens a company’s long-term viability. Palantir exemplifies this virtue, showcasing an impressive trajectory of fiscal responsibility and strategic growth. From a stronghold of $1.8 billion in cash with no burdens of debt in Q3 2020, they’ve bolstered their cash on hand to $3.3 billion, while maintaining a pristine debt-free ledger. This fiscal prudence is further underscored by their untouched $500 million credit facility, a testament to their liquidity strength.

The firm’s judicious management of stock-based compensation, which continues to shrink as a fraction of revenue, speaks to a sustainable cost structure. Palantir’s four consecutive quarters of GAAP net income have not only marked a turning point in profitability but have also primed them for potential inclusion in the S&P 500 (SP500) — a milestone that could broaden their investor base, enhance stock stability, and cement their standing in the market as a paragon of growth and profitability.

The Q3 earnings call demonstrated that Palantir’s financial discipline is not a mere byproduct of circumstance but the result of a deliberate, strategic approach. Their commitment is evident in the meticulous management of their unit economics, which have been optimized by transitioning from traditional pilot programs to AIP boot camps (“The Secret Sauce”). This shift not only accelerates customer acquisition and engagement but also significantly reduces costs associated with longer sales cycles, further bolstering their profitability. Palantir’s sustained investment in R&D, up 9% year-over-year, exemplifies their balanced approach—investing in innovation while maintaining profitability. This fine-tuned equilibrium between growth and cost control is a clear indicator of Palantir’s unwavering commitment to financial discipline and a harbinger of their long-term success.

Be Aware of All Potential Risks

Investing in Palantir carries inherent short-term risks, as with any technology stock. Palantir’s stock, reflected by its 2.7 beta, indicates a higher volatility compared to the broader market, potentially leading to significant price swings. An impactful and unexpected risk investors should be mindful of would be if Co-Founder and CEO Alex Karp decided to leave unexpectedly. I do not believe this has a high probability, but it is something to add to your list of risk in the stock.

A security breach, given Palantir’s data-sensitive clientele, could severely impact trust and stock value. When you think of all the government agencies for the United States and its Western Allies that use Palantir, this is a risk to fully be aware of and the impact it would have. One of the things Palantir prides itself on is its products being built with a security first approach, so this would be a meaningful impact if a security breach ever occurred.

The anticipation of Palantir joining the S&P 500 comes with the caveat of sustained profitability, and any falter in financial performance before it gets included could delay or negate this inclusion. I believe if Palantir lost eligibility in the short term for joining the S&P 500 you would see an impactful sell off by retail traders and institutional investors. In my long-term thesis Palantir will be a part of the S&P 500 at some point with their continued growth driving better unit economics for the business.

Government contracts, a substantial revenue source for Palantir, are subject to variability, with risks of delays, cancellations, or diversification to multiple vendors. If large government projects or contracts got canceled especially if the customers chose a different solution to adopt, this would cause immediate headwinds.

Another risk to be aware of would be if Palantir publicly states another aggressive multi-year revenue forecast as it previously did and does not meet that again. This scenario would undermine investor confidence and cause a significant drop from institutional investors.

The Missing Ingredient Uncovered for Palantir’s “Secret Sauce”

Palantir’s innovative go-to-market (GTM) strategy, the AIP Bootcamps, is the quintessential ingredient that completes their ‘secret sauce’. This strategic move addresses a pivotal challenge Palantir was facing—providing prospective clients with immediate, tangible exposure to their software’s capabilities. By condensing the traditional multi-month pilot process into intensive sessions that deliver real-world workflows on actual customer data in days, if not hours, Palantir effectively lowers the barrier to entry. This immediacy not only showcases the versatility and power of Palantir’s AI but also accelerates the conversion and expansion process, crucially transforming the company’s scalability and customer acquisition trajectory.

This strategy is rooted in Palantir’s value proposition which includes data integration, advanced analytics, and a strong emphasis on security and privacy—all tailored to industry-specific needs and use cases, ensuring flexibility and efficiency for their clients​​. In the past year, they have conducted an unprecedented number of boot camps—nearly half of which took place in a single month. By the end of November alone, Palantir is on track to have conducted boot camps for over 140 organizations, a figure that surpasses the total number of U.S. commercial pilots conducted in the entire previous year.

Palantir’s AIP Bootcamps have set a new industry benchmark with their “Proof vs. Proof of Concept” approach. This paradigm shift allows customers to engage directly with their own operational data within Palantir AIP, tackling and overcoming significant business challenges in an astonishingly short span of one to five days. Such an accelerated and tangible demonstration of value is only feasible when the software in question is exceptionally potent, intuitively designed, and straightforward to deploy. Palantir’s confidence in facilitating this rapid transformation speaks volumes about the inherent quality and effectiveness of their software products, which must perform impeccably to deliver outcomes in this condensed timeframe.

Palantir’s “secret sauce” is encapsulated in their Acquire, Expand, Scale business model—a strategy that aligns perfectly with the innovative AIP Bootcamps. Initially, Palantir absorbs the costs of pilots during the Acquire phase, often operating at a loss to onboard new customers by solving critical initial problems. As relationships mature into the Expand phase, Palantir assists customers in extending use cases across various departments, continually investing in the partnership. The culmination of this process, the Scale phase, sees the Palantir platform become an operational backbone for the entire enterprise, transitioning to positive contribution margins as the platform’s value is fully realized​​.

Palantir’s AIP Bootcamp GTM model offers a two-fold advantage. Firstly, it enables the company and its Forward Deployed Engineers to garner deep insights into the unique challenges prevalent across various industries. This hands-on interaction serves as a fertile ground for Palantir to refine and develop scalable, repeatable solutions tailored to industry-specific needs. Consequently, the model dramatically accelerates the adoption rate of Palantir’s platforms, as customers witness the resolution of their significant, industry-tailored problems. This not only empowers businesses with a competitive edge but also reinforces Palantir’s position as a pivotal ally in their clients’ quest for operational excellence.

What to Watch Moving Forward

Customer Count is a critical metric for Palantir, serving as a bellwether for the company’s growth trajectory. It’s the initial spark in their Acquire, Expand, and Scale model. As the customer base grows, so does the potential for expansion into different facets of the clients’ operations. When customers transition to the Scale phase, Palantir’s platforms become deeply entrenched in their daily business processes, increasing revenue and improving margins due to the high cost of switching away from an integrated, customized solution. Essentially, Palantir becomes the operational linchpin, too integral for companies to easily replace without substantial cost and disruption.

The key metrics I will be focused on in 2024 and after will be the following:

• Palantir’s overall customer count growth which they have averaged adding over 100 new customers annually for the last three years. This number is very important especially with the unique business model stages of acquire, expand, and scale. I would be thrilled if we could see in their 10K for 2023, the percent in which customers are in this journey.
• I will also be watching to see if GAAP operating income continues to grow exponentially, as this showcases their continued improvement in operating efficiencies.
• Another metric that will be interesting to track will be their Net Dollar Revenue Retention Rate as it was 107% due to the declined growth in Europe. When they finalize this NHS contract, I would anticipate that number to be much higher and open up new customer opportunities in Europe.

• From a solutions perspective, I am interested in seeing the growth of AIP and Apollo sales, the Palantir FedStart Program, and Palantir Government Web Services offering.

Overall, I am very bullish for the long-term trajectories of Palantir but do remind investors of the extreme volatility this stock has experienced these last three years, and I do not anticipate that to change soon. My “Strong Buy” rating on this stock is for those investors who are disciplined and patient enough to dollar cost average into a long position for 5 to 10 years. I am thankful I have been investing in this company continually for the last three years and plan on continuing to do such into the future.

Thank you for reading my article on Palantir and I would love to hear your thoughts on your thesis on Palantir as a company, the stock, and what your expectations are in the long term.