What happened

Shares of Palantir Technologies (NYSE:PLTR), the IT defense contractor, dropped hard earlier this week after analysts at Citigroup downgraded the stock to a sell rating with a $15 price target. Palantir had been trading north of $26 at the time, but investors were spooked by the megabank's negative tone, and spent the next two days selling off the stock, eventually sending it down nearly 5%.

Today, however, with the panic subsiding, investors are returning to Palantir in droves, and the stock was up 6.4% by 11 a.m. EST, above where it was when the sell-off started.

Stock up glowing green arrow climbs on a stock screen

Image source: Getty Images.

So what

On the one hand, nothing's really changed about Palantir's business except that one market participant (albeit a very influential one) expressed a change in opinion on the stock. That seems like a weak reason for everyone else selling the stock.

And yet the predictions Citi made in downgrading Palantir's stock haven't really had a chance to play out yet. As the analyst explained on Wednesday, there are a couple of negative catalysts awaiting Palantir investors in the year ahead. In the nearest term, the lockup period that prevents insiders from selling their shares will expire in mid-February, potentially unleashing a flood of new shares onto the market and depressing the stock price.    

Later in the year, Citi warns, multiple COVID-19-related contracts that Palantir won last year will approach their conclusion. If not renewed, this could depress sales and earnings at the tech specialist, and become "headwinds in the second half of 2021 and into 2022,"  TheFly.com reports.

Now what

That could be a concern if the contracts are not renewed. But just last month, the U.S. Army re-upped with Palantir on a data-analytics contract first awarded in December 2019 that is being used in the fight against COVID-19. While that contract's base portion ran for only one year, it contained options for renewal for as many as three additional years. And in this most recent renewal, the value awarded to Palantir actually increased, to $114 million.

Just two days after that, the United Kingdom signed a $31.5 million, two-year contract with Palantir to provide similar services to the National Health Service. And barely a week later, the company scored a $22.5 million contract with Japan's health service as well.  

It sure seems to me that Palantir's business is doing fine, and these health service contracts appear to be at little risk of going away anytime soon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.