Palantir Stock: Buy, Sell, or Hold?

One of the hardest-hit stocks in the recent market sell-off has been Palantir Technologies (NASDAQ: PLTR). While it is still trading up about 264% over the past year, the stock is down more than 31% from its recent highs, as of this writing.

The questions on many investors' minds are whether this is a great time to buy the stock, or is there more downside ahead. Let's explore the key points current and potential investors need to consider when making this decision.

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Is DOGE good or bad for Palantir?

One of the key questions surrounding Palantir is what impact will threatened government spending cuts and the Elon Musk-led DOGE (Department of Government Efficiency) have on its revenue growth.

The company started as a data gathering and analytics government contractor, and the U.S. government is still its largest customer, representing 42% of its revenue last year. Most of this comes from defense-related spending, as the company's solution has been used to help fight terrorism as well as on the battlefield.

Pre-DOGE, the company had started to see a solid rebound in its U.S. government segment, as the federal government began to embrace the use of artificial intelligence (AI) and Palantir's AI platform. However, with the White House telling the Department of Defense (DOD) to cut its budget by 8% a year over the next five years, the question becomes whether this will slow Palantir's U.S. government growth.

For his part, Palantir CEO Alex Karp was recently on Fox Business News saying he was very pro-DOGE, while adding that the company is participating in this and is "thrilled." Note, however, that Karp had been aggressively selling shares in his company and changed the parameters of his 10b5-1 selling plan in December, when he adopted a new plan. He had a 90-day cooling-off period, which just expired, and can now begin to start selling shares again.

Meanwhile, co-founder and president Stephen Cohen, who adopted a 10b5-1 plan the same day as Cohen, just sold 3.75 million shares worth $310 million, soon after the 90-day cooling-off period of his plan expired. That was most of the shares he had authorized to sell, with only an additional 310,000 shares left to be sold as part of the 10b5-1 plan.

While Karp's comments were undoubtedly meant to help his ailing company's stock price and get on the Trump administration's good side, the ultimate impact of DOD spending cuts on Palantir is an unknown, and thus a risk. The company could benefit if its solutions are deemed to create efficiency and cost savings, but its solutions aren't cheap.

Meanwhile, reducing the DOD budget by 8% a year over the next five years would take it from $850 billion in the current fiscal year to around $560 billion. That's a huge, nearly $300 billion reduction.

Image source: Getty Images.

Valuation vs. growth

Outside the government spending cuts, the biggest issues surrounding Palantir are its growth versus its valuation. The company is growing quickly in the commercial space due to its AI platform. While Karp noted the importance of AI models, he also called them "high school experiments" that are becoming commoditized. (As a side note, it's worth mentioning that Elon Musk, who is heavily involved in DOGE, has spent billions building his Grok AI models.)

As such, Palantir decided to eschew building out its own AI models in favor of developing software to process these AI models, focusing on the application and workflow software layers to essentially become an AI operating system for customers. It has marketed its AI platform to commercial customers through AI boot camps, where it helps them understand how to apply AI to mission-critical applications.

This has led to the company gaining a lot of new commercial customers. However, most of these customers are still in the early days of proof-of-concept, and Palantir has a big opportunity to move these AI applications into real-world production.

While Palantir has been seeing strong, accelerating revenue growth, the stock still trades at a very high valuation. Even after the pullback, the stock has a forward price-to-sales (P/S) multiple of 53. That is a very high valuation, even for a software-as-a-service (SaaS) company that grew its revenue by 36% year over year last quarter.

Is Palantir stock a buy, sell, or hold?

With executives dumping shares, a high valuation, and uncertainty over the impact of government spending cuts on its business, I would not be a buyer of Palantir stock at these levels. That said, I think it's a very good company, and I would be a buyer at the right price. However, that stock would need to fall in half from here for me to get interested.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.