Palantir (tkr: PLTR) is not a Software company no matter how hard it may try. It appears that Palantir has allocated a portion of Costs of Goods Sold to General & Administrative expenses in order to boost Gross Margins in-line with Software company Gross Margins (click here for PLTR table). Doing so helped PLTR benefit from a “Software-like” valuation on the firm’s recent IPO. The problem for PLTR is that G&A expense as a percentage of Revenues is far too high at 37%. This compares to 10-12% for a typical Software company exclusive of stock comp expense, therefore making it impossible for PLTR to disguise the fact that it is a Services company.

Thus far the accounting slight of hand has worked as PLTR trades at 42x Enterprise Value to 2020 Revenue. We became aware of Palantir in 2014 as we were building our Identity Hub fraud detection solution for P&C insurance carriers. Palantir has real technology and advanced analytics capabilities used by law enforcement and commercial customers. PLTR’s customer deployments are marked by big, heavy deployments that require the integration of various enterprise and third-party data sets. These data sets and related advanced analytic capabilities are made accessible via a “Software wrapper”. However, the nature of Palantir’s offerings share more in common with a Services company, less so an Enterprise Software company. Any well-run Enterprise Software company would generate 80% Gross Margins and 15-30%-plus Operating Margins (depending on the growth profile), on Palantir’s CY’20 $1 billion revenue base.

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