Palantir’s Margin Is Going Parabolic, and It’s All Due to This Winning Business Strategy

Palantir’s Margin Is Going Parabolic, and It’s All Due to This Winning Business Strategy

Palantir management detailed its secret to margin expansion on the recent earnings call.

Palantir (PLTR 11.14%) has been one of the biggest AI winners to date, with its shares up 240% on 2024.

As the AI revolution has made its way into Palantir’s AIP platform, commercial and government customers appear to be clamoring for its solutions.

And not only has revenue accelerated this year, but Palantir’s operating margin has also expanded in a big way. That stands in contrast with a lot of other software companies that have been displaying growth but with little or negative profitability.

On the call with analysts, management detailed how Palantir is achieving both sector-beating growth and profitability at the same time. It’s a winning business strategy investors should look for in any stock.

Operating margin booms

In the third quarter, Palantir’s adjusted (non-GAAP) operating margin expanded yet again, demonstrating excellent operating leverage as revenue growth picks up.

Metric

Q4 2023

Q1 2024

Q2 2024

Q3 2024

Revenue Growth (YOY)

20%

21%

27%

30%

Adjusted (non-GAAP) operating margin

34%

36%

37%

38%

GAAP operating margin

11%

13%

16%

16%

Data source: Palantir press releases. YOY= year over year.

Palantir has accelerated growth and expanded operating margin along the way. While not unheard of, many enterprise software-as-a-service companies typically plow all of their revenue growth back into sales and marketing to grow even more, resulting in either breakeven economics or slight losses. But last quarter, Palantir was able to grow its top line 30%, while sales and marketing grew only 18.8%. That has led to the continued growth in adjusted operating margin.

As management explained on the conference call with analysts, this margin expansion isn’t an accident, but the result of a clear strategy. And it’s a strategy many competitively advantaged businesses share.

Software engineers in a dark room.

Image source: Getty Images.

Put it all into the product

The strategy Palantir is adopting, which is the hallmark of other top consumer and enterprise brands, is to concentrate fully on making a differentiated product that delights consumers. In theory, once a product is superior enough to competitors, that top brand won’t have to put as many resources into sales and marketing.

On the earnings call last week, Palantir CEO Alex Karp said:

instead of trying to have 10,000 clients, all of whom hate you, this is kind of what people want: 10,000 clients that hate you, but they can’t give you your product. We want a smaller number of the world’s best partners that, quite frankly, are dominating with our product. And the way you do that is by not blowing up your margin and getting 10,000 salespeople. It’s actually by going deeper on the product. And in fact, what we see is the deeper and better the product, the more we drive sales, the more we have our singular advantage as Palantir, not as a commodity product.

Thus, instead of trying to serve as many clients as possible, Palantir tries to serve a manageable number very deeply. That’s also a part of the company’s go-to-market strategy, in which Palantir embeds its engineers deeply into a prospective customer’s business without seeing much money at first. Once Palantir’s R&D engineers integrate Palantir’s software platforms deeply to tackle specific customer problems and opportunities, the revenue flows after.

Proving this out, Palantir’s net retention rate was 118% last quarter, meaning existing customers bought about 18% more of Palantir’s software on average than last year. Moreover, that net expansion rate actually accelerated by four percentage points.

Karp also identified another positive aspect to Palantir’s strategy. This is when you deliver differentiated positive outcomes to one customer, and that customer’s employee moves companies, that person is is likely to call up Palantir and ask for its services at the new company. “Anyone who’s involved in the enterprise, so if you take a company XYZ, and then five people go to a different company, the first thing they do is pick up the phone and call us,” Karp noted.

Top brands share the same strategy

When you think of premier consumer brands, you might realize that a lot of them don’t advertise very much. Apple doesn’t. Tesla doesn’t even go through the traditional dealer model that other auto brands do. And certain enterprise brands just don’t need to advertise much. Microsoft is one of them, given the strong network effects of its software products.

The commonality is that by leading with top, differentiated products, each of these brands doesn’t have to spend as much on sales and marketing, leading to high margins and returns on capital.

So if you can find a company that has found a way to grow without having to spend much on sales and marketing, you may have found the makings of a great long-term investment.

Billy Duberstein and his clients have positions in Apple and Microsoft. The Motley Fool has positions in and recommends Apple, Microsoft, Palantir Technologies, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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