How Palantir Is Looking To Take On Big Defense Contractors

Palantir Technologies stock (NASDAQ: PLTR) has gained close to 11% over the last five trading days. The stock has also risen over 4.5x since the beginning of the year, trading at about $82 per share currently. So what’s been driving the recent gains?

Over the last week, the Financial Times reported that Palantir and Anduril, another U.S. defense technology company, were talking with several other tech companies including Elon Musk’s SpaceX to form a consortium that would jointly bid for U.S. government defense contracts traditionally dominated by an oligopoly of so-called “prime” contractors such as Lockheed Martin and Raytheon. While these traditional contractors produce expensive and long-lead times assets such as ships, tanks, and aircraft, there could be a shift to lighter, more autonomous weapons developed by Silicon Valley startups as well as more advanced AI software products which Palantir specializes in. These moves could help companies such as Palantir garner a larger share of the massive $850 billion-plus U.S. defense budget. Separately, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Besides these recent developments, much of Palantir’s gains have come from the market frenzy surrounding artificial intelligence stocks as well as stronger-than-expected quarterly earnings. Moreover, the rally actually gained momentum after the U.S. elections. The stock has surged close to 2x since election day. Investors are optimistic that a Donald Trump-led Republican administration will increase federal spending on national security and immigration, driving demand for Palantir’s software tools. Palantir’s co-founder Peter Thiel, was an early Trump ally and he is also seen as holding a fair bit of influence within the incoming administration. Some technical factors have driven the stock up as well. Palantir stock was recently added to the Nasdaq-100 following the index’s annual reconstitution. The company moved its stock listing from the NYSE to the Nasdaq in late November, and its inclusion in the Nasdaq-100 has likely boosted demand for the stock from exchange-traded funds.

Now the increase in PLTR stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were -23% in 2021, -65% in 2022, and 167% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could PLTR face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

We believe the stock is a high-risk trade at this juncture for a couple of reasons, including its high valuation, heavy dependence on government sales, as well as considerable insider selling in the stock. See A Closer Look at Palantir’s Key Risks The stock trades at over 50x consensus FY’25 revenue and more than 170x consensus FY’25 earnings. However, the company’s growth rates are pegged at just about 25% for both 2024 and 2025 per consensus estimates. In comparison, cloud data warehousing and analytics player Snowflake trades at about 12x revenues with its growth rates also being in a similar range. In fact, AI bellwether Nvidia (NASDAQ:NVDA) stock trades at just about 30x estimated earnings for the next fiscal, even though revenues are on track to more than double this year, with the consensus projecting over 50% growth for next year. (Should you Buy, Sell, Or Hold Nvidia Stock?) Although we do believe that Palantir will see higher demand for its products and services as AI adoption picks up in the commercial space, the stock’s current valuation seems to be disconnected from its fundamentals.

[1] Returns as of 12/27/2024
[2] Cumulative total returns since the end of 2016