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Shares of Palantir Technologies (PLTR) have declined by about 25% from their peak of $125.41. The decline comes after an impressive rally over the past year, which pushed the company’s valuation to elevated levels. Besides valuation concerns, a new challenge has emerged, adding pressure to the stock.
According to a report from The Wall Street Journal, the U.S. government plans to cut its defense budget over the next five years. This news is particularly significant for Palantir, as government contracts have long been a key driver of its revenue. If military spending tightens, the company could face obstacles in sustaining its growth momentum.
The Impact of Defense Budget Cuts
Palantir’s revenue growth has been accelerating, climbing from 13% in Q2 2023 to an impressive 36% in Q4 2024. This momentum has been largely driven by increasing demand for artificial intelligence (AI) solutions, particularly from government agencies.
In Q4 2024 alone, revenue from U.S. government contracts surged 45% year-over-year as federal agencies ramped up their use of Palantir’s AI-powered software for national security and defense operations. During its most recent earnings call, management highlighted the growing demand for AI-driven solutions across government functions.
However, with government clients accounting for 55% of Palantir’s total revenue in 2024, any reductions in defense spending could create uncertainty.
Commercial Business on the Rise
While Palantir’s government contracts remain a significant source of revenue, its commercial business is growing rapidly and is likely to reduce its exposure to government contracts. The adoption of its Artificial Intelligence Platform (AIP) among commercial customers has led to increased customer acquisitions and deeper engagement with existing customers.
Palantir’s U.S. commercial revenue surged 64% year-over-year to $214 million in the fourth quarter of 2024. For the full year, it climbed 54% to $702 million.
The company also witnessed strong growth in total contract value (TCV) for its U.S. commercial business, which jumped 134% year-over-year to reach $803 million. Additionally, the total remaining deal value in its U.S. commercial segment nearly doubled, reflecting strong demand for AI-driven solutions across various industries. Further, Palantir’s customer base in this segment expanded by 73% to 382 clients.
Management expects U.S. commercial revenue to surpass $1.079 billion in 2025, a 54% increase from the previous year. Meanwhile, Palantir’s total revenue for 2025 is projected to be between $3.741 billion and $3.757 billion, representing a 31% growth rate at the midpoint. This suggests that U.S. commercial revenue is growing faster, which could help boost the company’s margins and cash flow.
However, whether this growth will be enough to offset the anticipated slowdown in government revenue remains uncertain.
Is Palantir Stock Undervalued?
Despite the recent decline in its share price, Palantir’s valuation remains elevated. The stock trades at a price-sales (P/S) ratio of 79.2x, significantly higher than many of its peers in the software industry. Additionally, its price-earnings (P/E) multiple stands at 254.2x based on the projected EPS of $0.38 for 2026. These metrics suggest that Palantir is not at all undervalued, and any slowdown in its growth could drag it lower.
Final Thoughts
Palantir has emerged as a software leader in the enterprise AI space at a time when AI adoption is accelerating. The company is well-positioned to benefit from this trend and deliver solid growth. However, despite its growth potential, Palantir’s premium valuation and the uncertainty surrounding government contracts present notable challenges. While its commercial segment is expanding rapidly, it must sustain this momentum to justify its expensive valuation.
At present, Wall Street remains cautious about Palantir stock, with analysts maintaining a “Hold” consensus rating. Their average price target of $84.22 implies downside potential from current levels.
