(Bloomberg) — Last week’s rout in Palantir Technologies Inc. shares has done little to convince skeptics that it’s suddenly a bargain.
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The stock is mired in its biggest four-day drop since 2022, following news that Defense Secretary Pete Hegseth plans to reduce projected US military spending by 8% over the next five years, potentially jeopardizing a key source of revenue for the firm.
While some investors speculated Palantir could ultimately emerge as a winner from any push to make the Pentagon more lean, the headline spurred a selloff in what remains tech’s priciest name.
“While the multiple is a little more realistic now, I wouldn’t consider it a great value, and there’s still tremendous execution risk and uncertainty,” said Tim Pagliara, chief investment officer at Capwealth Advisors. “It is hard to project growth until we know what the military budget will look like.”
The stock fell 4.6% on Monday. It has dropped more than 20% over the four-day decline.
The data-analysis software company has been one of the biggest winners of the artificial-intelligence boom, rising more than 300% in the past year and adding almost $190 billion in market value.
But Palantir stands out among tech firms for the significant share of its revenue that comes from the US government. With President Donald Trump pledging to cut federal spending, what had been a tailwind for the stock has suddenly become a major worry.
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Hegseth set a Feb. 24 deadline for input on proposed cuts, meaning investors may be about to get more clarity around the impact on Palantir, and defense contractors broadly.
More than 40% of Palantir’s 2024 revenue was US-government related, data compiled by Bloomberg show, and that segment grew more than 40% in each of the past two quarters, according to Bloomberg Intelligence. This kind of exposure is unusual, according to BI, noting that it tended to be around mid- to high-single digits for most of the firm’s software peers.
Military spending is especially important: 22% of Palantir’s government revenue comes from the US Army, William Blair analyst Louie DiPalma estimated.
It’s worth noting that the stock is particularly volatile. It had a steeper slump last month, which set the stage for an advance that drove it to a record closing high on Tuesday, before the news of the planned spending reductions.
“If anyone’s looking for an excuse to take profits, a headline like that certainly is it,” said Jack Ablin, chief investment officer at Cresset Wealth Advisors, which owns the shares.
“The administration will likely sharpen a pencil, take a hard look at all of the spending, and I think vendors like Palantir will likely continue to receive the business and will likely expand,” he said.
Palantir remains one of the the best-performing Nasdaq 100 Index components this year, up about 28%. And it has defied naysayers before, rallying earlier this month on the back of a strong revenue forecast. The company said it was seeing “untamed organic growth” for its AI software.
Some analysts say the AI tailwind diminishes risks around government budgets. Wedbush, which gives it an outperform rating, said “Palantir’s unique software approach will enable the company to gain more IT budget dollars at the Pentagon,” and cuts “will ultimately be a positive growth catalyst.”
Wall Street showed little panic last week amid the selloff, with consensus forecasts for earnings and revenue both rising. There is no denying, however, that the stock is still richly valued, leaving it vulnerable.
Shares trade at more than 170 times estimated earnings, making it the most expensive component of the S&P 500 Information Technology Sector by a wide margin, nearly twice as costly as runner-up Crowdstrike Holdings Inc. The figure for the overall sector is below 30.
The elevated valuation is frequently cited as a concern, and more than half the analysts tracked by Bloomberg have the equivalent of hold ratings on the shares, with six saying buy and five recommending to sell. The stock is roughly 4% above the average 12-month price target, among the worst projected returns among tech companies.
Still, Capwealth Advisors’ Pagliara who owns the stock, stressed that he’s confident in Palantir’s long-term potential with the Pentagon. “A military that’s focused on efficiency and adaptiveness will spend more on tech and AI, and because of that it seems highly probable that Palantir will buck any budget-cut trends,” he said. “I’m not concerned the way I would be about a company that makes tanks.”
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