Palantir Technologies Faces Stock Downturn Amid US Military Spending Cuts: Long-Term Prospects Remain Bright

Palantir Technologies Inc. shares experienced a significant downturn last week, with a four-day drop marking the largest decline since 2022. This downturn followed news that Defense Secretary Pete Hegseth plans to reduce projected US military spending by 8% over the next five years, potentially impacting Palantir’s revenue, which is heavily reliant on government contracts. Despite the selloff, some investors remain optimistic about Palantir’s long-term prospects, citing the company’s strong performance in the artificial intelligence sector and its potential to benefit from increased government spending on tech and AI.

Palantir’s stock fell 4.6% on Monday, contributing to a more than 20% drop over the four-day period. The company, which has seen its market value increase by almost $190 billion in the past year, stands out among tech firms for its significant revenue share from the US government. Over 40% of Palantir’s 2024 revenue is US-government related, with the US Army accounting for 22% of its government revenue. This exposure to government spending has become a major concern, especially with President Donald Trump pledging to cut federal spending.

Despite the risks, some analysts believe that Palantir’s unique software approach will enable the company to gain more IT budget dollars at the Pentagon, and that budget cuts could ultimately be a positive growth catalyst. Palantir remains one of the best-performing components of the Nasdaq 100 Index this year, up about 28%, and has defied naysayers before, rallying on the back of a strong revenue forecast. The company reported “untamed organic growth” for its AI software.

However, the stock’s elevated valuation remains a concern, trading at more than 170 times estimated earnings, making it the most expensive component of the S&P 500 Information Technology Sector. More than half of the analysts tracked by Bloomberg have hold ratings on the shares, with six recommending a buy and five suggesting to sell. Despite the risks, some investors remain confident in Palantir’s long-term potential, particularly with the Pentagon.