Palantir is rapidly productizing its offerings, best evidenced by a rising contribution margin. Contribution margin is defined as “revenue less cost of revenue and sales and marketing expenses, excluding stock-based compensation, divided by revenue.”
Increasing contribution margin signals lower cost of deployment and therefore improved unit economics. As a leading indicator of profitability, all margins follow suit. Contribution margin is therefore the Palantir thesis’s most signal-rich metric: if it rises quickly, so too will cash flow production.
Per my original thesis, aggregate contribution margin has risen from 54% in FY2022 to 56% in FY2023. More impressively, the metric has risen from 55% in Q1 2023 to 60% in Q1 2024, implying a meaningful acceleration in the rate of productization.
As the bootcamps themselves are productized–thus enabling Palantir to conduct more bootcamps per unit of time–I believe contribution margin will accelerate further. I also believe we can already see this dynamic in this quarter’s acceleration.
At the current rate of acceleration, the contribution margin will rise above 90% in the coming years and this will fundamentally change Palantir moving forward.
At 90%, seamless deployment will allow Palantir to drastically increase the number of customers per vertical, enabling a blueprint for scaling infrastructure that becomes accessible to companies N+1 and beyond.
This approach frees each subsequent company from purchasing raw compute and allows them to acquire computation tailored precisely to their operational objectives. Drawing a parallel to gasoline, this shift is akin to providing wildcatters with industrial drilling equipment.
This changes how computation is sold in the market and places Palantir at the top of the cloud compute funnel–in the fortunate position of being able to redirect prospective customers to the cloud hyperscalers. In time, this should proliferate Palantir’s operating capability and, thus, free cash flow levels per share.
