When Republican presidential nominee Donald Trump was campaigning, one of his more consistent talking points was a concern over areas of wasteful federal spending. This rhetoric inspired the creation of a new program called the Department of Government Efficiency (DOGE) after Trump's election victory on Nov. 5.
For the most part, DOGE has focused on cutting ties with expensive contractors and organizations employed by various government agencies. Back in February, Trump essentially extended the idea of DOGE to the military. Specifically, he ordered Defense Secretary Pete Hegseth to identify cost savings around the defense budget.
Shortly after this news became public knowledge, shares of artificial intelligence (AI) analytics software darling Palantir Technologies (PLTR 1.66%) took quite a beating. Given the company derives roughly half of its revenue from federal contracts (much of it with the Department of Defense), it's not entirely surprising that investors reacted emotionally to the news of budget cuts at the Pentagon and assumed it was bad news for Palantir.
Yet recent reporting suggests that the Department of Defense (DoD) is parting ways with another AI software player. Let's explore some of the Pentagon's recent moves and assess why I'm doubling down on my idea that Palantir has a unique opportunity to benefit from these cost reductions.
NASDAQ: PLTR
Key Data Points
Which AI company did the Pentagon just target?
On March 20, Hegseth published a memo in which he outlined the termination of $580 million worth of contracts that were deemed wasteful.
Among these deals was a contract to build a human resources software platform. According to the DoD's memo, this contract "is currently 6 years behind schedule and more than $280 million (780%) over budget -- with at least 2 more years of development and testing estimated before initial operating capability."
According to contract records, the HR platform was being managed by Oracle. While a move like this is a blow for Oracle, I'll break down why I see it as a potential tailwind for Palantir.
Image source: Getty Images.
Why I'm doubling down on my Palantir stance
Hegseth and the Pentagon's leadership are taking a calculated, intentional approach to these cost reductions -- implementing a strategy known as the Software Acquisition Pathway (SWP). In other words, the DoD isn't simply identifying contracts attached to high dollar values and canceling them blindly. Rather, in partnership with DOGE, the Pentagon is looking closely at its vendor relationships and digging into major contracts that are running over budget and abnormally behind schedule.
As the chart above shows, shares of Palantir haven't recovered since peaking back in late February -- around the time the Pentagon's budget reductions started to become public.
Nevertheless, the dynamics around the Pentagon's SWP approach could work in Palantir's favor. With the cancellation of the Oracle HR deal (and presumably more reductions with other software providers to follow), Palantir has an opportunity to persuade DoD leadership to consider using its software ecosystem for other applications and use cases beyond the battlefield and stealth operations.
I see the budget cuts at the Pentagon as an under-the-radar tailwind for Palantir during the next four years, and one that the company is uniquely positioned to take advantage of given its existing footprint with the military in particular.
Although a growth stock such as Palantir is likely to remain volatile in the short term, I think now is an interesting opportunity for long-term investors to consider buying some shares because I see the current negative investor sentiment around the company as overblown and misaligned.
