Shares of Large-cap Software company Palantir Technologies were down -0.7% during today's morning session, as the S&P 500 posted a 1.1% change. PLTR has a lot of attention from younger, growth-oriented investors -- but how closely have they studied the company's margins?
While Palantir's gross margins for the last year are positive, we are concerned that the company's operating margins are in the red. Gross margins take into account only the cost of revenue, or variable costs -- meaning the cost directly associated with producing the products or providing the service offered by the company.
Operating margins, on the other hand, take into account the company's overhead as well. Overhead, also called fixed costs, includes the company's rent, salary for personnel not included in cost of revenue, equipment and supplies, amortization, and depreciation. Operating margins tell you about how efficiently Palantir Technologies is run, and gross margins tell you how profitable its services are.
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 1,541,889,000.0 | 339,404,000.0 | 77.99 | 15.13 |
| 2020-12-31 | 1,092,673,000.0 | 352,547,000.0 | 67.74 | 0.56 |
| 2019-12-31 | 742,555,000.0 | 242,373,000.0 | 67.36 | -6.73 |
| 2018-12-31 | 595,409,000.0 | 165,401,000.0 | 72.22 | n/a |
Since Palantir's cost of revenue is growing is growing at a faster rate than its revenue (43% vs 37%), the only explanation for the widening margins is that the company is increasing its sale prices at a faster rate than its cost of revenues. Since prices cannot be increased indefinitely, Palantir's gross margin growth will eventually slow unless it can get its cost of revenue under control.
| Date Reported | Total Revenue ($) | Operating Expenses ($) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 1,541,889,000.0 | 1,952,935,000.0 | -26.66 | 75.18 |
| 2020-12-31 | 1,092,673,000.0 | 2,266,352,000.0 | -107.41 | -38.36 |
| 2019-12-31 | 742,555,000.0 | 1,318,999,000.0 | -77.63 | 22.93 |
| 2018-12-31 | 595,409,000.0 | 1,195,149,000.0 | -100.73 | n/a |
The table above tells us that Palantir has not been profitable over the last four years, which should be a warning sign to prospective investors. One bright spot, however, is that operating margins are growing at an average yearly rate of 19.9%. There may be light at the end of the tunnel.
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