Palantir Technologies (NASDAQ: PLTR) shares have been red hot for the past couple of years, but the stock was tumbling after Defense Secretary Pete Hegseth ordered the Pentagon to slash its $850 billion budget by 8%, or about $50 billion.
Even more alarming is that the White House is looking to reduce the budget of the Department of Defense (DoD) by 8% a year over the next five years. The government was Palantir's largest customer in 2024, representing nearly 42% of its total revenue, with most of that coming from the DoD and branches of the military.
Palantir CEO Alex Karp has also adopted a new Rule 10b5-1 plan, which is used by executives and other insiders to sell their company's shares based on a set of parameters that they give to brokers. These plans are used to avoid any illegal insider selling and can be as simple as selling shares on set dates regardless of price, to using more complicated triggers. In the past, Karp's plans have been more complex, and he began to greatly increase his selling last September.
Under his old plan, Karp sold 37.6 million shares, generating nearly $1.5 billion in proceeds. Under the new plan, he will be able to sell nearly 10 million shares through mid-September. He still had the ability to sell about 11 million shares under his old plan when he canceled it for the new plan, so it appears that he wanted to change the selling parameters.
Defense spending cuts
Under the directions of Hegseth, the Trump administration wants the DoD spending cuts directed toward "woke" programs such as fighting climate change, as well as excess bureaucracy, while directing funds toward projects such as securing the country's borders, drones, and the Iron Dome for America missile defense system.
While there likely won't be any cuts to Palantir's programs, the question becomes how much room for growth will there be. An 8% annual DoD budget reduction combined with military money being directed toward border control and a big missile defense project appears to leave less room for other projects.
The opposing argument, though, is that Palantir's artificial intelligence (AI) solutions can help create efficiency, and thus more money could be directed toward the company's software platform.
In the past, Palantir has seen its government revenue growth be a bit unpredictable. In 2023, its government revenue growth hit a trough of 14% after seeing 19% growth in 2022 and 47% in 2021. It picked back up to 30% growth in 2024, including jumping 45% in the fourth quarter. The company was seeing strong momentum as the government was becoming more receptive to its new AI solutions.
At the same time, the stock became a Wall Street darling due to the strides it was making in the U.S. commercial sector, which saw revenue climb 54% in 2024, including a 64% surge in the fourth quarter. Palantir has been gaining a lot of momentum in the commercial sector from its AI platform, which can be used to address mission-critical tasks across various industries.
The running joke is that most Palantir investors don't actually know what the company does. Its roots are as a data gathering and analytics vendor for the government, finding non-obvious patterns. These solutions have been used to fight terrorism and track coronavirus cases.
With AI, however, it has evolved to become an AI operating system, where it uses logic, functionality, and rigorous testing so that customers can use AI to accomplish tasks in real world environments. It has spurned building AI models, focusing instead on the application and workflow layers of AI.
Palantir has been able to attract a lot of commercial customers to its platform. However, many of these newer customers are still in the proof-of-concept stage with AI, with the company having a big opportunity to them into production.
Image source: Getty Images
Should investors buy the dip or sell?
The biggest negative against Palantir has largely been valuation. Even with the big drop in price, the stock still trades at a forward price-to-sales (P/S) multiple of 62 times 2025 analyst revenue estimates.
To put that in context, at its peak a few years ago, the software-as-a-service (SaaS) sector was trading at around 20 times sales with over 30% average revenue growth. Palantir grew total revenue by 29% last year and has forecast 31% growth at the high end of its guidance for 2025.
The company has a chance to grow into its valuation if it can continue to move customers from proof-of-concept into production. However, if growth once again dries up at its largest customer, the government, then it will be really difficult to justify the stock's current valuation.
At this time, exactly how DoD budget cuts will affect Palantir Technologies is an unknown, but I don't want to be holding a stock trading at 62 times sales with it facing this type of potential risk. As such, I'd move to the sidelines.
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Geoffrey Seiler 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.
