Palantir Stock Falls 27% from Peak, Is It a Smart Buy Now?

An In-Depth Look at Palantir Technologies’ Investment Viability

Palantir Technologies, a prominent player in AI data analytics software, has experienced a sharp decline in its stock price, plummeting 27.2% from its all-time high of over $120 to $90.68 in the latest trading session. This steep downturn unfolded over four consecutive days, pushing the stock into a bearish phase, characterized by a decline exceeding 20% from its peak value. The most significant drop occurred recently, with a single-day loss of 10.5%, the steepest since May of the previous year. Despite this drop, Palantir's stock remains up 20% year-to-date, significantly outperforming the S&P 500, which has seen a modest gain of 1.7%. This raises the question: What factors are contributing to the volatility of Palantir Technologies' stock, and does the current price present a buying opportunity for long-term investors interested in AI growth stocks?

The recent sell-off in Palantir's stock is primarily attributed to concerns regarding potential budget cuts by the U.S. Department of Defense, a critical client for the company. Over 40% of Palantir's sales last year were linked to government contracts, with a substantial portion coming from the Army. The prospect of budget reductions has alarmed investors, compounded by CEO Alex Karp's intention to sell a significant number of shares, which has further shaken investor confidence. However, analysts largely identify the anticipated defense budget cuts as the main driver behind the decline in Palantir's stock price. Despite this setback, Palantir's fundamentals remain strong; the company's government-related revenue has soared over 40% for two consecutive quarters, distinguishing it from many software peers that are struggling with single-digit growth. While this reliance on government contracts is a strength, it also exposes Palantir to potential risks associated with changes in federal spending priorities.

Valuation concerns persist for those considering Palantir stock as a potential investment. At the current price of $90.68, the stock trades above its pre-earnings level of $83.74 from early February, when a robust earnings report led to a 24% gap-up to $103.83. However, its forward price-to-earnings (P/E) ratio stands at an elevated 163.3 based on this year’s earnings projections, a significant reduction from last week’s 200 but still nearly double that of CrowdStrike, the second-highest priced stock in the S&P 500 IT sector, and far above the sector's average of 30. For investors seeking undervalued AI stocks, this premium valuation raises concerns, indicating that Palantir Technologies may be less appealing to bargain hunters despite the recent price drop. Analysts from CNBC have noted that while the multiple has become more realistic, it still doesn't present a compelling value proposition given the execution risks associated with budget uncertainties.

Nevertheless, there remains a sense of optimism surrounding Palantir's long-term growth narrative, particularly among those enthusiastic about AI software investment opportunities. The company is projected to achieve a revenue increase of 28.79% in 2024, reaching $2.87 billion, with a notable 36% rise in Q4 to $828 million. This growth has been driven by a remarkable 64% surge in commercial sales and a 45% increase in government revenue. Looking forward, Palantir's revenue guidance for 2025, estimated at $3.74 billion to $3.757 billion, suggests a robust 31% growth trajectory, fueled by escalating demand for its AI platforms, including Gotham, Foundry, and AIP. Experts like Dan Ives from Wedbush contend that defense budget cuts could inadvertently strengthen Palantir's market position, as its software aligns with efficiency-driven initiatives like the Department of Government Efficiency (DOGE), which has been championed by Elon Musk—whom Karp has publicly supported as a key figure for government reform. This alignment hints at Palantir's future growth potential, especially if it manages to capture a larger share of IT budgets in response to the push for military adaptability and AI integration.

The sentiment among analysts regarding Palantir's stock investment potential is mixed but leans towards caution. Of the 23 analysts tracked by CNBC, 13 recommend holding the stock, five suggest selling, and only five advocate for buying, with an average price target of $90.89—almost identical to its current price. Tim Pagliara, CIO at CapWealth Advisors, acknowledges the stock's moderated valuation but warns of significant execution risks and uncertainties until defense spending plans become clearer, although he remains optimistic about its long-term upside as a bet on AI-driven defense innovation. Similarly, Jack Ablin of Cresset Wealth Advisors believes Palantir will thrive as government scrutiny of spending creates opportunities for efficiency-focused firms, while CFRA's Janice Quek emphasizes its competitive advantage in AI software aligned with DOGE’s objectives. For investors contemplating whether to purchase Palantir stock now, this divergence in opinion underscores the tension between its high-growth potential and imminent challenges.

The interaction of these elements—strong fundamentals, a high valuation, and dependence on government contracts—frames the decision-making process for anyone considering an investment in Palantir Technologies. The company’s remarkable 64% commercial growth provides a buffer against public sector volatility, suggesting a potential for revenue diversification over time. However, with the Pentagon contemplating cuts of up to $50 billion annually over five years, according to NPR reports, the stock's fate is partially contingent on the nature of these reductions and Palantir's ability to adapt to capitalize on efficiency-driven mandates. For long-term investors attracted to high-growth AI stocks, the recent decline might represent a strategic entry point into a company well-positioned to leverage the AI trend, provided they can accept the elevated P/E ratio and budget-related risks. Conversely, short-term traders might find the prevailing uncertainty too daunting, particularly given analyst projections indicating limited upside from the current level. Monitoring developments in defense budgets and Palantir's ability to expand its commercial presence will be critical in determining the right timing for an investment.

Ultimately, assessing whether Palantir stock is a worthwhile investment following its 27% decline from peak levels hinges on individual investment goals and risk tolerance. Its impressive gains this year and leadership position in AI analytics render it an attractive option, but the elevated valuation and exposure to government contracts necessitate a careful and considered approach. For those investigating Palantir Technologies' stock performance or seeking the next significant AI investment, the current pricing offers an opportunity to balance proven momentum against upcoming uncertainties, while closely observing how federal spending evolves in the months ahead.