Palantir shares fall due to planned Pentagon budget cuts

Palantir Technologies shares have risen sharply in recent years, but after Defense Secretary Pete Hegseth ordered the Pentagon to cut its $850 billion budget by 8%, or about $50 billion, the stock price has fallen. Even more alarming, the White House plans to cut the Department of Defense (DoD) budget by 8% annually for the next five years. The government was Palantir’s largest customer in 2024, accounting for nearly 42% of total revenue, with the majority of that coming from the DoD and military departments.

CEO Alex Karp changes share sales plan

Palantir CEO Alex Karp has adopted a new stock sale plan used by executives and other insiders to sell their company shares based on certain parameters. In the past, Karp’s plans were more complex, but he began selling heavily last September. Under his old plan, Karp sold 37.6 million shares and made nearly $1.5 billion. The new plan allows him to sell nearly 10 million shares by mid-September. Since he still had the option to sell about 11 million shares under his old plan, it appears he wanted to change the sale parameters.

budget cuts and growth potential

Under Hegseth’s leadership, the Trump administration wants to focus DoD budget cuts on “woke” programs like fighting climate change and redundant bureaucracy, while allocating funds to projects like securing the nation’s borders, drones, and the Iron Dome missile system for America’s defense. There probably won’t be any cuts to Palantir’s programs, but the question is how much room there is for growth. An 8% annual DoD budget cut, coupled with the use of military funds for border control and a major missile defense project, leaves less room for other projects. The opposing argument, however, is that Palantir’s artificial intelligence (AI) solutions can create efficiencies, and thus more money could be channeled into the company’s software platform.

Unpredictable growth and high valuation

Palantir has a history of unpredictable growth in government revenue. In 2023, government revenue growth bottomed out at 14% after growing 19% in 2022 and 47% in 2021. However, growth rebounded to 30% in 2024, including a 45% increase in the fourth quarter. The company also gained momentum in the U.S. commercial sector, with revenues growing 54% in 2024, including a 64% increase in the fourth quarter. Palantir has gained a lot of momentum in the commercial sector with its AI platform, allowing it to handle mission-critical tasks across various industries.

The biggest criticism of Palantir, however, is its high valuation. Even after the sharp drop in share price, the stock still trades at a price-to-sales (P/S) ratio of 62 times 2025 revenue estimates. In comparison, the software-as-a-service (SaaS) sector traded at about 20 times sales a few years ago and averaged revenue growth of over 30%. Palantir grew total revenue by 29% last year and is forecasting 31% growth for 2025, at the high end of the forecast.

Conclusion and Recommendation

It’s unclear how the DoD budget cuts will affect Palantir Technologies, but given the potential risk, I wouldn’t want to hold a stock that trades at 62 times sales. There’s a chance the company could grow into its valuation if it continues to move customers from concept to production. However, if growth stalls again at its largest customer, the government, it will be very hard to justify the stock’s current valuation, so I’d hold off for now.

Source: The Motley Fool, Image source: iStock ( https://g.foolcdn.com/editorial/images/808380/gettyimages-1522425869.jpg )

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