Palantir Applied sciences (PLTR -4.63%) shares have been crimson scorching for the previous couple of years, however the inventory was tumbling after Protection Secretary Pete Hegseth ordered the Pentagon to slash its $850 billion finances by 8%, or about $50 billion.
Much more alarming is that the White Home is trying to cut back the finances of the Division of Protection (DoD) by 8% a yr over the subsequent 5 years. The federal government was Palantir’s largest buyer in 2024, representing practically 42% of its complete income, with most of that coming from the DoD and branches of the army.
Palantir CEO Alex Karp has additionally adopted a brand new Rule 10b5-1 plan, which is utilized by executives and different insiders to promote their firm’s shares based mostly on a set of parameters that they offer to brokers. These plans are used to keep away from any unlawful insider promoting and may be so simple as promoting shares on set dates no matter value, to utilizing extra difficult triggers. Prior to now, Karp’s plans have been extra complicated, and he started to enormously enhance his promoting final September.
Below his previous plan, Karp offered 37.6 million shares, producing practically $1.5 billion in proceeds. Below the brand new plan, he’ll be capable of promote practically 10 million shares by way of mid-September. He nonetheless had the flexibility to promote about 11 million shares underneath his previous plan when he canceled it for the brand new plan, so it seems that he needed to vary the promoting parameters.
Protection spending cuts
Below the instructions of Hegseth, the Trump administration needs the DoD spending cuts directed towards “woke” packages akin to preventing local weather change, in addition to extra paperwork, whereas directing funds towards tasks akin to securing the nation’s borders, drones, and the Iron Dome for America missile protection system.
Whereas there possible will not be any cuts to Palantir’s packages, the query turns into how a lot room for progress will there be. An 8% annual DoD finances discount mixed with army cash being directed towards border management and a giant missile protection venture seems to depart much less room for different tasks.
The opposing argument, although, is that Palantir’s synthetic intelligence (AI) options will help create effectivity, and thus more cash might be directed towards the corporate’s software program platform.
Prior to now, Palantir has seen its authorities income progress be a bit unpredictable. In 2023, its authorities income progress hit a trough of 14% after seeing 19% progress in 2022 and 47% in 2021. It picked again as much as 30% progress in 2024, together with leaping 45% within the fourth quarter. The corporate was seeing robust momentum as the federal government was changing into extra receptive to its new AI options.
On the identical time, the inventory grew to become a Wall Road darling as a result of strides it was making within the U.S. industrial sector, which noticed income climb 54% in 2024, together with a 64% surge within the fourth quarter. Palantir has been gaining lots of momentum within the industrial sector from its AI platform, which can be utilized to handle mission-critical duties throughout numerous industries.
The operating joke is that almost all Palantir traders do not really know what the corporate does. Its roots are as an information gathering and analytics vendor for the federal government, discovering non-obvious patterns. These options have been used to combat terrorism and monitor coronavirus circumstances.
With AI, nevertheless, it has advanced to turn out to be an AI working system, the place it makes use of logic, performance, and rigorous testing in order that clients can use AI to perform duties in actual world environments. It has spurned constructing AI fashions, focusing as a substitute on the applying and workflow layers of AI.
Palantir has been capable of appeal to lots of industrial clients to its platform. Nonetheless, many of those newer clients are nonetheless within the proof-of-concept stage with AI, with the corporate having a giant alternative to them into manufacturing.
Picture supply: Getty Photos
Ought to traders purchase the dip or promote?
The most important unfavourable towards Palantir has largely been valuation. Even with the large drop in value, the inventory nonetheless trades at a ahead price-to-sales (P/S) a number of of 62 instances 2025 analyst income estimates.
To place that in context, at its peak just a few years in the past, the software-as-a-service (SaaS) sector was buying and selling at round 20 instances gross sales with over 30% common income progress. Palantir grew complete income by 29% final yr and has forecast 31% progress on the excessive finish of its steering for 2025.
PLTR PS Ratio (Ahead) information by YCharts
The corporate has an opportunity to develop into its valuation if it might proceed to maneuver clients from proof-of-concept into manufacturing. Nonetheless, if progress as soon as once more dries up at its largest buyer, the federal government, then it is going to be actually tough to justify the inventory’s present valuation.
At the moment, precisely how DoD finances cuts will have an effect on Palantir Applied sciences is an unknown, however I do not wish to be holding a inventory buying and selling at 62 instances gross sales with it dealing with such a potential danger. As such, I would transfer to the sidelines.
