Palantir GAAP Profits: The Cost of Responsibility
Powerful but not profitable?
Editor: Emanuele Marabella
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After 20 years of GAAP losses, markets were incredibly skeptical of Palantir being able to show GAAP profits. As Palantir reported their first GAAP Earnings, they received an incredible resonance in the news (Palantir Q4 GAAP Profits: Fake Yet Good).
The opportunity cost
While the market cheered on the event, we must be aware that the pursuit of profitability comes at the cost of relatively low growth.
The Guidance released for FY23 hints at ~16% growth. This is substantially lower than the 24% achieved in FY22, the 41% achieved in FY21, and the ~30% initially targeted at the DPO.
So a question popped into my mind:
Are they sacrificing growth or is this paradoxically a brilliant marketing move?
One particular comment from Karp made me realize I missed a crucial dynamic:
“But if it's so powerful and so good, why aren't you profitable?” And I think, you know, we took this question a lot more seriously than I think people on the outside realize precisely because there are literally thousands and thousands of users and at this point, countries that depend on our product for their survival. […] the people whose lives depend on our product have been very dependent on us and want to know that our financial stability now and in the future is guaranteed.” - Alex Karp
Palantir has such an important role in Governments and Companies that it is crucial for them to show that their financials are extremely healthy due to the highly related responsibility.
Once clients rely on Palantir for their operations, Palantir becomes of systemic importance to them.
Shyam, Palantir CTO, even associated Palantir with the cardiovascular system of a client:
“So when we think about our software platforms, we really think about them as operating systems, not systems of insight, but really the way that your business runs, you know, operating systems that aspire to act as the nervous system, as the cardiovascular system of your enterprise.” - Shyam Sankar, Palantir CTO
A few examples come to my mind where Palantir plays a critical role:
Aviation: uses Palantir to track the health of Airbus planes;
Warfare: Ukrainians rely on Metaconstellation to target Russian tanks;
Healthcare: 10% of the total US Hospital System runs operations on Foundry.
Therefore, I believe Palantir needs to show GAAP profitability as a way to ensure clients can rely on its stability even in the worse times.
Showing GAAP profitability becomes a need, a sealing and ultimately a marketing tool.
Palantir basically saved costs to become GAAP profitable, in turn, this became an effective marketing headline in order to establish confidence in existing and prospective clients.
However, it must be noted, that this could have some side effects. To remain GAAP profitable, Palantir, perhaps, cannot spend as aggressively as they initially planned. Therefore, it is crucial for us to keep track of their business progress to verify if they can expand significantly without the cost reductions in play.
The war chest now makes sense
Through the lens of Palantir needing to prove their “systemic importance” to clients, Palantir’s choice of piling up Cash now makes sense.
The cash parked becomes a “warranty” that Palantir is actually built for bad times.
Clients need to know that; no matter the macroeconomic shock, Palantir will be around, providing their software. Essentially, in order to show its resiliency and efficiency, Palantir needs to show that its financials are healthy.
We could argue that piling cash to a level far superior to what is needed for the operations, could be a way to reinforce its marketing, proving that Palantir is in fact “disaster-proof.”
Cash reserves and GAAP profitability are on this trajectory.
However, there is a negative note to this; if Palantir needs to pile up cash as a “warranty,” this could prevent Palantir from becoming aggressive with their spending.
The risk is missing out on commercial opportunities.
“Our commercial offering is now becoming the default choice for an increasingly broad swath of customers that require both immediate and durable results from their investment in enterprise software.” - Alex Karp, Palantir CEO