Transcription
Palantir stocks just collapsed by over 20 percent after their most recent earnings call, and honestly, it was pretty justified. There were a bunch of issues in their most recent earnings report, and they did very little to address them on that call.
So, I'm going to walk you through the good, the bad, and the very ugly parts of their earnings report, and then tell you what I'm doing about it. Now, your time is valuable, so let's get right into it. Full disclosure: I have a sizable long position in Palantir, but that's not going to stop me from tearing them a new one.
Let's start with the good. All the numbers I'm going to talk about are year-over-year increases unless I specifically say something like quarter-over-quarter. Cool?
Palantir's revenue grew 31 percent year over year, right in line with their overall 30 percent growth guidance. Commercial revenue is up by 54 percent, and Palantir's U.S. commercial revenue grew by a whopping 136 percent. Their customer account nearly doubled, so they've been seeing some huge growth on the commercial side, which is exactly what we want to see as they continue to pivot into that sector.
Total commercial revenue for the quarter was 205 million dollars, and total government revenue was 241 million dollars. So, Palantir's commercial revenue made up 46 percent of their total revenue. Again, this is a big step in the right direction.
It's also worth noting that their operational losses are coming way down, from 114 million dollars last year to only 40 million dollars this year. Stock-based compensation, which was one of the biggest concerns all shareholders had about Palantir, actually dropped by thirty percent year over year. That's one way for Palantir to attract and keep talent. So, I personally don't mind seeing some stock-based compensation, especially while there's a serious workforce shortage and rates for programmers and salespeople are very competitive.
Research and development costs stayed flat, while sales and marketing costs are up about 30 percent. Those are the exact kinds of expenses that we expect to see as Palantir continues to pivot their existing platforms and products to new markets.
Their total expenses went up by around seven percent, but their revenue grew by 31 percent, meaning the business is getting more efficient. Keep in mind that these sales and marketing costs are something that they won't see the full benefits of for a few years since sales teams take some time to ramp up, contracts take some time to get signed, and then customers take time to increase their total spending with Palantir.
And that brings us to the bad news. Palantir's net dollar retention is 124 percent. What does net dollar retention mean exactly? It means that for every dollar a customer spent with you one year, they spend this much more or less with you the following year.
So, if your sales tactic is to land a client and expand your business with them over time, net dollar retention measures how well you're doing that. Palantir's net dollar retention is 124 percent, which means that on average, for every dollar a customer spends with Palantir a year ago, they spent one dollar and 24 cents with them last quarter. That sounds good, but their net dollar retention in 2021 was 131 percent.
What this could mean is that Palantir is a little less sticky with smaller commercial clients who may be trying just one piece of Foundry and then deciding to go with a competitor's solution instead. That actually makes sense; some of Palantir's services do overlap with competitors like Snowflake, and the commercial market is a very competitive one. The problem here is I'm totally guessing because Palantir didn't address this number directly on their earnings call.
Speaking of which, I just wrote a piece on Palantir's earnings call over at public.com, today's sponsor. Public.com is an awesome investing platform and social network all rolled into one. Public is free to use, with no account minimum, no fees on standard trades, and lets you buy slices of stock for as little as one dollar. They also have a huge community where thousands of other long-term investors constantly share investment ideas.
I've been sharing my coverage on Palantir's earnings calls, their investments in other companies, and how their platforms work together to solve big data problems. If you're looking for a new home for your portfolio or you just want to see the trades I make in mine, go to public.com, ticker symbol U, and you'll receive a free slice of stock worth up to one thousand dollars when you fund your account. I'll leave a link to that huge offer for you in the description below. Thanks to public.com for sharing that offer with my community.
Okay, so Palantir's net dollar retention rate is down by a few percent. That's one thing. Their operating margins increased from minus fourteen percent to minus nine percent in a single quarter, and that's a lot better than the minus thirty-three percent that they were at a year ago. So, they're still on the path to GAAP profitability, but this is actually where things start to get ugly.
Take a look at their adjusted operating margin: 26 percent. Is that up or down from a year ago? Well, last year they showed this plot of their margins both before and after adjusting for things like stock-based compensation. The message behind this plot is clear: If you take out Palantir's stock-based compensation and employer taxes, Palantir's operating margins are steady around 30 percent.
So, as they lower these specific expenses, they get closer to true GAAP operating margins of thirty percent. Well, this year they straight up deleted that chart. So, I went ahead and rebuilt it myself with the most up-to-date numbers. They reported adjusted operating margins of 26 percent this past quarter, and next quarter they're guiding for just 20 percent. They do say that they expect an adjusted operating margin of 27 percent for the full year, but that's still down from the 30 percent that we've seen in the past.
I'm not saying we should worry about this drop, but I am saying that they didn't give it enough attention in their earnings call, and straight up deleting the plot in this presentation isn't helping anyone, especially not Palantir or their shareholders.
Right under this part of their quarterly financials, Alex Carp reiterates his guidance for at least 30 percent annual revenue growth through 2025. But for this next quarter, they're guiding for a base case of 470 million dollars, which is only a 25 percent year-over-year increase. Right next to that, the report mentions that there's a wide range of potential upside to this guidance. What is this range? How big of an upside is there? Any downside? Analysts even asked about this on the earnings call, and Palantir's team dodged the question—actually twice.
And again, it's not about this short-term drop in numbers that worries me; it's the dodging and lack of clarity around them. Speaking of clarity, let's talk about Palantir's messaging in general and Alex Carp's letter to shareholders specifically. This has to be Palantir's weakest point as a company, and it's crazy that they're not working around the clock to fix it.
Shout out to fellow YouTuber Sasha Yanchin, who went on an incredible spot-on rant about this letter on his channel right when it came out. But the incessant patting yourself on the back, the non-stop praising how awesome you are and how bad everybody else is—how everyone else sucks—is maybe not the best way to present a growth company that has yet to show it can turn a GAAP profit.
Together with a sales pitch of a costly earnings score that was an absolute disaster, that caused a complete destruction of the share price, it really does raise some major questions for investors. If you don't follow Sasha, you really should; he brings that kind of heat to every video he posts, and boy does this shareholder letter deserve a lot of heat.
Alex Carp spends around half the letter talking about Palantir's values—finding peace in a world rife with conflict, building a culture that fosters free expression and discourse, even if it comes with some discomfort along the way. These are all noble things to strive for, but there are at least three big problems with this letter.
First, it takes him around 300 words to say what I just said in 30. Most people probably got to around this part about German philosophy and then bailed to look at funny cat videos on TikTok. That's like one-fifth of the way through this letter.
Second, he talks all about these pie-in-the-sky ideas but never connects them back to what Palantir actually does or how they actually do it. Seriously, do you know what Palantir does today? Drop a comment below with your thoughts, but don't look at any other answers. Let's see how different some of the responses can get. Hey, no cheating!
Here was the worst part of the letter for me as a shareholder and personal believer in Palantir's mission: Alex Carp talks about Palantir being built for the world that is, not the world that ought to be—not like those other companies in Silicon Valley. But then, just a few sentences later, he says that there's a big tension between what the customer thinks their needs are today and Palantir's opinion of their needs in the future.
And that reveals Palantir's fundamental challenge: undervaluing what their customers may need in the short term. That short term is today. So, does Palantir have a good product market fit today or not? Nobody knows, because Palantir's messaging is so unclear.
It's not just the systems engineers and administrators they need to be convincing; it's the regular men and women holding the purse strings who are very often not that technical. Look, I worked as a government data analyst for a long time. I really respect and admire the work that Palantir is doing, and I believe in this company long term. But I bet Palantir would double their commercial growth if they just focused on being clear instead of clever—in their videos, on their website, in their investor presentations, and even in their CEO interviews.
The actual databases were not set up to be abstract out of the databases, where the abstraction is actually the reality. I really believe that clarity needs to start from the top. So, I won't be selling any of my shares for now, but I'm going to be watching Palantir's net dollar retention rate, their operating margins, their commercial deal flow, and their future marketing materials like a hawk.
I'm thinking long and hard before I lock up any more of my money in Palantir. If they don't start explaining what they do, how they do it, and what it means for their bottom line in this kind of market, I bet a lot of shareholders are going to move their money to a company that will want to know what Palantir actually does at a high level.
Check out this episode next, or if you want to check out Sasha's full roast of their earnings call, check out this video right here. And if you feel I've earned it, hit those like and subscribe buttons. That lets me know to create more videos like this one. Thanks for watching, and until next time, this is Ticker Symbol U. My name is Alex, reminding you that the best investment you can make is in you.