Palantir Technologies Faces Challenges Amid Defense Budget Cuts
After the U.S. presidential election, Palantir Technologies (NASDAQ: PLTR) Stock surged nearly 200%. However, it has since dropped over 30% from its peak on February 19. The artificial intelligence (AI) firm is experiencing rapid growth, yet its heavy dependency on government contracts raises concerns among investors. Potential budget reductions from the Department of Defense and other agencies could adversely affect the company. Despite these challenges, Palantir retains a valuation exceeding $195 billion.
What is the current status of Palantir Stock? Is it a good time to take advantage of this price decline? Let’s examine the software company’s position and consider how its Stock could integrate into your investment strategy.
Impact of Pentagon Budget Cuts
The Trump administration has initiated significant cost-cutting measures within the federal government. The spotlight is now on the Department of Defense, which oversees an annual budget of $850 billion—one of the largest government expenditures. New Secretary of Defense Pete Hegseth has proposed an 8% reduction each year for the next five years, marking a sustained push against defense spending.
Hegseth’s strategy begins with a focus on workforce cuts, targeting over 5,000 civilian jobs. This news prompted investor concern for Palantir and other defense contractors, disrupting the momentum the Stock had following its Q4 earnings release. As a result, the Stock has declined in six of the last eight trading days.
While budget cuts could challenge defense contractors in the long term, some analysts argue they might benefit Palantir. The company specializes in providing efficiency-enhancing software and AI tools to the federal government. If these tools generate overall cost savings, they may lead to new contracts.
In 2024, Palantir earned $1.57 billion from government contracts, which is a modest figure relative to the entire federal budget. Despite proposed cost cuts from the current administration, there is optimism that this revenue will continue to grow in the coming years.
Diversifying from Government Contracts
In recent times, government contracts have constituted a smaller fraction of Palantir’s revenue. The firm has successfully ventured into the commercial sector, acquiring hundreds of customers for its AI and software solutions.
U.S. commercial revenue surged 64% year over year in Q4 2024, reaching $214 million. The commercial segment now represents 45% of Palantir’s total sales, a growth rate exceeding that of the government segment.
The commercial market presents a substantial revenue opportunity for Palantir, potentially exceeding $10 billion. Last quarter, the backlog of U.S. commercial contracts increased by 99% year over year to $1.79 billion.
This trend indicates that Palantir is on a path to reduce its dependence on federal government contracts. If budget cuts at the Department of Defense arise, they shouldn’t completely derail the business.
Data by YCharts.
Should Investors Consider Buying Palantir Stock?
Despite a 32% decline in under two weeks, Palantir Stock may not be a definitive buy.
Prior to the sell-off, Palantir’s price-to-sales (P/S) ratio exceeded 100. Currently, it stands at 73, reflecting high expectations for future growth and earnings.
For context, Palantir reported $2.87 billion in revenue last year. If the company achieves a 30% annual growth rate over the next five years, its revenue could reach $10.65 billion. Assuming a 30% profit margin—which would be a significant improvement—annual earnings could total $3.20 billion.
Given Palantir’s market capitalization of nearly $200 billion as of now, this optimistic five-year earnings projection would yield a price-to-earnings (P/E) ratio of 62. Therefore, even with continued growth and improved profitability, the Stock appears overpriced after its recent decline. Valuation is crucial, and investors should approach it with caution.
Is Palantir Technologies a Smart $1,000 Investment Right Now?
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
