Palantir's Stock is Continuing to Decline. Is the Selloff Justified?

Shares of Palantir Technologies Inc. experienced a sharp decline on Wednesday, and the downward trend appears likely to continue into Thursday. Investors seem to be reacting to concerns that a potential new directive under a Trump administration could lead to significant defense budget cuts.

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The stock has already dropped 4% in premarket trading on Thursday, following a steep 10% decline during Wednesday’s session. However, some analysts argue that the market reaction may be misguided.

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Wedbush analyst Dan Ives believes that rather than hurting Palantir, potential reductions in the Defense Department’s budget could actually work in the company’s favor.

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According to Ives, Palantir is well-positioned to thrive in a more disciplined spending environment. He suggests that as the Pentagon reassesses its programs for efficiency, Palantir’s “unique software approach” will make it a key player in securing government contracts.

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“Palantir is in the sweet spot to benefit from a tidal wave of federal spending on AI,” Ives explained, emphasizing that the company’s AI-driven solutions could be instrumental in helping government agencies streamline operations while maintaining effectiveness.

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The company’s stock has surged over the past year, largely due to the growing adoption of its Artificial Intelligence Platform (AIP). In its most recent earnings report, Palantir posted strong revenue growth, crediting AIP for significantly reducing the time customers spend on various processes.

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Government contracts continue to be a major revenue driver for Palantir. In the fourth quarter, U.S. government-related revenue accounted for more than 60% of the company’s total U.S. revenue, growing at a rate of 45%. However, Palantir’s U.S. commercial sector saw even stronger growth, expanding by 64%.

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Ives believes concerns about defense spending reductions represent the latest bearish argument against Palantir’s stock, but he remains unconvinced. The company’s shares have defied skeptics, soaring nearly 400% over the past year, even with Wednesday’s sharp decline.

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Despite its impressive gains, Palantir remains a divisive stock on Wall Street. Some investors argue that its valuation has outpaced its fundamental growth. The company trades at 65.5 times forward sales expectations, according to FactSet data, a significantly higher multiple than many of its software industry peers.

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For comparison, Salesforce Inc. shares trade at less than eight times forward sales estimates, while ServiceNow Inc. is valued at 15.2 times forward sales. The Nasdaq 100 Index, which includes many high-growth tech firms, has an average forward sales multiple of 6.1 times.

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Analyst sentiment on Palantir remains mixed. Of the 26 analysts covering the stock tracked by FactSet, only eight, including Ives, hold bullish ratings. Thirteen analysts maintain neutral stances, while five rate the stock as a sell or equivalent.

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As Palantir’s stock faces short-term pressure, investors will be watching closely to see whether the company’s strong AI-driven business model can sustain its long-term momentum despite uncertainties surrounding government spending.

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