Palantir Technologies (PLTR) shares have declined after Defense Secretary Pete Hegseth mandated an 8% reduction in the Pentagon’s budget, amounting to approximately $50 billion from its $850 billion budget. The White House plans to continue this annual budget cut for the next five years, increasing concerns for Palantir, as the government constituted nearly 42% of its total revenue in 2024, primarily from the Department of Defense (DoD) and military branches.
Palantir shares decline amid Pentagon budget cuts and regulatory changes
CEO Alex Karp has initiated a new Rule 10b5-1 plan, enabling him and other insiders to sell shares under specific parameters to comply with insider trading regulations. Karp’s previous plan allowed him to sell 37.6 million shares for nearly $1.5 billion. Under the new plan, he can sell about 10 million shares through mid-September, having already canceled his old plan despite still having the ability to sell approximately 11 million shares under it.
The planned budget cuts target so-called “woke” programs focused on climate change and bureaucracy, redirecting funds toward border security, drones, and the Iron Dome missile defense system. This shift raises questions about the potential for growth in Palantir’s business, as an 8% annual reduction could constrict funding availability for other projects.
Despite the budgetary pressures, there is an argument that Palantir’s artificial intelligence (AI) solutions may enhance efficiency and thus secure more funding in the long term. Historically, Palantir has experienced volatile government revenue growth, peaking at 47% in 2021, dipping to 14% in 2023, and rebounding to 30% in 2024, with significant momentum noted in Q4.
On February 19, 2025, Palantir announced a strategic partnership with SAUR Group, a leader in water distribution and environmental services, to enhance contract management using Palantir Foundry’s Generative AI capabilities. This multi-year deal aims to transform complex contract management, potentially opening new revenue streams. Given Palantir’s focus on AI, this partnership could strengthen investor confidence in its commercial growth, especially in non-government sectors.
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During a CNBC interview, CEO Alex Karp made supportive comments about Elon Musk, leading to speculation of potential collaborations (Karp’s Pro-Musk Comments). This resulted in Palantir’s stock reaching a new 52-week high of $125 during intraday trading, with a 4.6% increase that day, reflecting market optimism and retail investor enthusiasm.
CEO’s Stock Sale Plan: Later on February 19, 2025, a regulatory filing revealed Karp adopted a Rule 10b5-1 trading plan to sell nearly 10 million shares, potentially worth $1.23 billion, by September 12, 2025. This was seen as a significant insider sale, often interpreted as a lack of confidence, causing concern among investors. Notably, Karp canceled a previous larger plan, which might mitigate some negative perception, but the market reacted poorly, contributing to a plunge in after-hours trading.
Pentagon Budget Cut Reports: Concurrently, on February 19, 2025, The Washington Post reported that Defense Secretary Pete Hegseth ordered plans for 8% annual budget cuts over five years, impacting the defense budget currently at $850 billion (Pentagon Budget Cuts Report). Given Palantir’s reliance on government contracts (nearly 60% of revenue), this news posed a risk to future earnings, further pressuring the stock price.
Palantir has also gained traction in the commercial sector, with revenue growth of 54% in 2024, including a notable 64% increase in the fourth quarter. The company’s evolution from a data analytics vendor to an AI operating system has attracted numerous commercial customers, although many are still in the proof-of-concept phase for AI implementation.
The valuation of Palantir remains a concern, with the stock currently trading at a forward price-to-sales (P/S) multiple of 62 based on 2025 analyst revenue predictions. This figure is significantly higher than the peak P/S ratio of around 20 times in the software-as-a-service (SaaS) sector during years of over 30% average revenue growth. While Palantir has forecasted revenue growth of 31% for 2025, sustaining growth from its primary government customer is critical to justifying the stock’s current valuation.
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Featured image credit: Palantir
