Palantir Technologies (PLTR) has been on a hot streak in recent years. However, its stock recently took a hit following Defense Secretary Pete Hegseth’s announcement that the Pentagon’s $850 billion budget would see an 8% cut, equating to about $50 billion.
Adding to the concern, the White House is considering an annual 8% reduction to the Department of Defense (DoD) budget for the next five years. This is especially significant because Palantir heavily relies on government contracts, with 42% of its revenue in 2024 stemming from this sector, primarily from the DoD and military branches.
CEO Alex Karp, in a strategic move, has introduced a new Rule 10b5-1 plan. This plan allows company insiders like Karp to sell shares based on specific criteria, designed to prevent unlawful insider trading. Historically, Karp’s plans have been intricate, with a notable increase in his share sales since last September. Under his previous strategy, he offloaded 37.6 million shares, pocketing nearly $1.5 billion. The fresh plan permits the sale of approximately 10 million shares until mid-September. When he transitioned to this plan, he still had 11 million shares available for sale under his old arrangement, indicating a desire to alter the existing parameters.
### Impact of Defense Spending Cuts
Hegseth’s directives under the Trump administration have prioritized redirecting the DoD’s budget. Funds are to be shifted from “woke” programs, such as climate change initiatives and bureaucracy, towards areas like border security, drones, and America’s Iron Dome missile defense. Consequently, while Palantir’s projects may not face direct cuts, the scope for growth could diminish. With military spending funneled into new areas and an 8% annual budget cut, the room for other ventures appears limited.
However, proponents argue that Palantir’s AI solutions might drive operational efficiency. This could lead to more resources being allocated to its software platform. Historically, Palantir has seen fluctuating government revenue growth: a low of 14% in 2023 followed by a bounce to 30% in 2024, with a notable 45% surge in the fourth quarter. This uptick coincided with increasing government acceptance of Palantir’s AI innovations.
Simultaneously, the company made waves on Wall Street due to its progress in the U.S. commercial sector, which saw a 54% revenue leap in 2024, culminating in a 64% rise in Q4. Palantir’s commercial influence has grown, thanks to its AI platform’s ability to tackle critical business challenges across various sectors.
Jokes abound that many Palantir investors might not fully grasp the company’s operations. Originally, Palantir specialized in data analytics for government use, helping identify hidden patterns for counter-terrorism and COVID-19 tracking. Today, with its AI capabilities, it has transformed into an AI operating system, prioritizing real-world applications over AI model development.
The company’s commercial clientele is expanding, though many are still experimenting with AI’s potential. This presents a significant opportunity for migrating these clients into full-scale production.
### Should Investors Consider Buying or Selling?
Palantir’s primary challenge has been its valuation. Even after the recent price drop, the stock’s forward price-to-sales (P/S) ratio remains steep at 62 times the 2025 revenue forecast. For context, the software-as-a-service (SaaS) sector, at its peak a few years back, traded around 20 times sales with over 30% annual revenue growth. Palantir reported a 29% revenue increase last year and targets up to 31% growth for 2025.
Palantir could justify its current valuation by converting more proof-of-concept clients into active users. However, if growth stalls, particularly in its major client, the government, justifying this valuation becomes challenging.
At this point, the exact ramifications of DoD budget cuts on Palantir Technologies remain uncertain. Given the stock’s high valuation amid such potential risks, my recommendation would be to adopt a cautious stance and stay on the sidelines.
