Palantir Technologies (PLTR 1.66%) has been one of the high-flyers of the artificial intelligence (AI) boom. The company's earnings and share price have soared in recent years thanks to its AI-driven software that allows governments and businesses to pump up efficiency, drive down costs, and make game-changing moves.
Quarter after quarter, the company has reported double-digit revenue gains in its government and commercial businesses. And the stock advanced more than 1,100% since its market debut in 2020 through early February of this year, continuing to roar higher even as some analysts sounded the warning bell, saying the stock had become too expensive.
Finally, a plan from the Pentagon -- a major Palantir customer -- to launch budget cuts was the element to send shares tumbling. Over the past two weeks, the stock has retreated more than 30%. Are investors right to worry about this potential headwind and stay away from Palantir, or is the stock a buy on the dip? Let's find out.
Image source: Getty Images.
Palantir's AIP
First, a quick summary of the Palantir story so far. The company offers software systems that help its customers aggregate disparate data so they can make better use of valuable information. A little over a year ago, it launched its Artificial Intelligence Platform (AIP), which harnesses the power of large language models (LLMs) to incorporate AI into the data collection and analysis process. This has become a highly popular product, allowing corporate and government customers to make AI-driven decisions in real time.
For example, in a demonstration video, Palantir shows how AIP is able to quickly evaluate risk on a battlefield, devise three potential plans of action, and send them up the chain of command for consideration.
Palantir has recently seen a surge in commercial business as companies seek to leverage AI for growth, but the company's biggest customer over time has been the U.S. government. In the latest quarter, it accounted for more than 40% of Palantir's total revenue. So, it's no surprise that news of spending cuts at the U.S. Department of Defense would spark worries about Palantir's earnings prospects.
NASDAQ: PLTR
Key Data Points
Now, the question is whether these worries are warranted. The department said last month that it would cut 8%, or about $50 billion, from certain programs in the current budget and reallocate the money toward President Trump's priority defense programs.
"That's not a cut; it's refocusing and reinvesting existing funds," said Pete Hegseth, defense secretary, in a statement.
Could the government's decision actually be positive for Palantir?
The idea that this is a reallocation and not a cut suggests this news may not weigh on Palantir's business. In fact, AIP's broad range of uses and its ability to improve efficiency could make it a sought-after tool across many government programs -- from defense to other departments -- especially considering the Trump administration's focus on efficiency. This actually might result in more demand for AIP, potentially working in Palantir's favor. So, at this point, concerns about this news hurting Palantir's growth may be overdone.
It's also important to remember that Palantir's commercial business is growing in leaps and bounds. The company only had 14 U.S. commercial customers four years ago, and it now has 382. And these customers are bringing in more and more revenue. In the latest quarter, Palantir closed more than $800 million in U.S. commercial total contract value -- a record. That's a 134% increase over the year-earlier period. So Palantir, which once was associated mainly with government contracts, no longer depends so heavily on that business.
Two measures of valuation
Now, let's take a look at valuation. Though Palantir still seems pricey trading at 149x forward earnings estimates, it's worth considering another metric that incorporates growth -- since Palantir is a high-growth company. And that's the PEG ratio, which today is about 0.7. A PEG ratio of less than 1, suggests a stock may be undervalued, meaning Palantir could be an excellent buy right now from this perspective.
Of course, the Defense Department news still could weigh on demand for Palantir stock until we know exactly how funds will be allocated. So, it's impossible to predict whether the stock will immediately rebound. Some investors might wait to be 100% certain that these government moves won't hurt Palantir before getting in on the stock.
So, what should you do in this case? The decision depends on your comfort with risk. If you're a very cautious investor, you may want to remain on the sidelines until the stock price stabilizes -- and be on the lookout for more details about how the government will allocate funds. But for investors who can accept some risk and plan on holding on for the long term, Palantir makes a fantastic AI buy now on the dip.
