Alex Karp Claims Palantir’s Results ‘Dwarf’ Software History — Q1 Shows He Isn’t Exaggerating

Palantir (NASDAQ:PLTR | PLTR Price Prediction) just delivered one of the most impressive quarterly blowouts in its history, but it wasn’t quite enough to power a turnaround in the stock. Not with expectations as high as they were and broader fears surrounding what AI could do to some of the software plays out there, including ones that have already successfully pivoted.

While investors aren’t yet in a rush to back up the truck for Palantir after the incredible number, I do think that the letter from CEO Alex Karp was full of interesting food for thought as investors look for a bit of perspective on the state of the AI boom. Indeed, it’s not hard to think of the boom as getting quite bubbly, especially with the great Michael Burry publicly disclosing his own bearish bets against firms such as Palantir.

Palantir’s latest quarter sets a high bar. That’s exactly why investors might be growing nervous

With a lot of less-than-useful AI tools and content across the internet, it can certainly feel at times like AI is nothing more than a bubble. And when you’ve got a genius in Burry who’s remarking on his thoughts of such a bubble, it’s hard to go against the man with a long position in a name like Palantir.

In any case, Karp notes that there exists a “no-slop” zone that’s not just a commoditized wrapper around someone else’s large language model (LLM). Indeed, Karp is right on the money, and the incredible growth numbers from the latest quarter are doing the talking. While it can be tough for investors to tell what’s just a wrapper and what’s a moat-worthy piece of infrastructure that can actually produce value from the AI underneath the hood, I do think that we’re entering an era of haves and have-nots within software.

Indeed, the SaaS-pocalypse sell-off has marked everything down across the industry in a rather indiscriminate fashion. With Palantir’s AI Platform (AIP) positioning standing tall as one of the firms in the “no-slop zone” (the government would probably never settle for “slop”) in these earlier days, investors might wish to put the firm in a group of its own. Karp did note that Palantir has “an N of 1.”

Palantir might be in a class of its own, but for how long?

Could it really be that Palantir is in a class of its own? And will that change over time? Will AI innovators at the frontier eventually go after Palantir’s lunch, as Burry warns? As always, it’s impossible to tell right here, but shares of Palantir are expensive. Though perhaps the price of admission can be justified if Palantir’s results do end up “dwarfting” the rest of the software industry.

The first quarter might be just a taste of the kind of out-of-this-world high-margin hyper-growth. But if the explosiveness can’t be sustained, the multiple re-rating could have the potential to be painful. After Q1, Palantir has pretty much taken off in a way no other software firm has. It’s pretty much blasted off above and beyond the rule of 40, which implies the sum of the growth rate and profit margin should be at least 40%. For that last quarter, Palantir’s figure was at 145%.

With AI’s disruptive impact, the rule of 40 is becoming harder bar to pass. But, at the same time, as more firms look to fall below that 40% level, there are bound to be more AI-first innovators that are hitting new watermarks. The big question for Palantir is, where does it go from here now that it’s ready to leave the rest of the software behind? Will it succumb to the laws of gravity, or will AI help make it such that a new “rule” is needed?

What is the new rule of 40 in the AI age? Is it the rule of 145 now? Or will it be markedly higher or lower? Time will tell. For now, it seems like investors want to wait to see how Q2 goes.