As calls grow louder for Elon Musk to exit the Department of Government Efficiency and turn his focus back to Tesla, William Blair analyst Louie DiPalma says that government and military tech contractors such as Booz Allen Hamilton, CACI International and Palantir Technologies may stand to benefit.
Musk is expected to face questions about whether he's getting ready to depart DOGE when Tesla holds its Q1 earnings call after Tuesday's close. Despite "permanent brand damage" inflicted on Tesla by Musk's lightning-rod role serving President Donald Trump, Wedbush Securities analyst Dan Ives wrote Sunday that "the long term story will not be altered" if he leaves government service.
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DOGE Targets IT Contracts
"We are incrementally positive on the group following the reports that Elon Musk may soon leave DOGE," DiPalma wrote in a Monday note. "Defense IT services shares are also viewed as defensive in the face of tariffs and a potential recession. In theory, the U.S. federal government raising money via tariffs is positive for defense spending because it reduces the deficit, thereby decreasing the need for material cuts to the defense budget."
Still, it's not clear how big of a role DOGE and Musk are playing in the push for budget savings from government and military tech contractors. There's also competing evidence about how deep those cuts are going. Further, expectations of a trillion-dollar 2026 defense budget vs. the $895 billion figure for 2025 "contrasts with investor fears," DiPalma wrote.
DiPalma noted that the General Services Administration is directing the effort to make significant contract cuts, according to media reports. So far, Dipalma wrote that William Blair has "not observed any material contract cancellations," though there is a "major push" to shift contracts to a fixed-price structure.
However, Defense Secretary Pete Hegseth said on April 10 that he had ordered the cancellation of "wasteful" contracts with IT and consulting companies including Accenture, Deloitte, Booz Allen and others, saving $4 billion.
DiPalma added that 10 consulting firms were given an April 18 deadline "to volunteer cost savings."
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In an April 11 note, Goldman Sachs downgraded BAH to neutral from buy, paring its price target to 109 from 150, saying that DOGE data suggests Booz Allen was bearing a disproportionate share of contract cuts.
Through Q1, though, Defense Department operations and maintenance outlays were up 7%, consistent with Q4 growth, William Blair said. "SAIC and CACI actually increased their financial outlooks on recent earnings calls," DiPalma wrote.
For now, William Blair is keeping market perform ratings on BAH, CACI, PLTR and the rest of the group. Truist analyst Tobey Summer reiterated buy ratings on CACI and BAH on April 14, saying the group could become more investable in coming months after DOGE-related reworking of contracts provides more visibility.
