What Drove The Palantir Sell Off?

While Palantir Technologies stock (NASDAQ: PLTR) had a stellar 2024, with its stock rising by about 4x,  driven by the market frenzy surrounding artificial intelligence stocks and optimism about the results of the U.S. election. However, the stock has faltered in 2025, declining around 7% year-to-date and slipping 11% in the past week, trading at approximately $68 per share.  A couple of factors have been weighing the stock down of late. For one, Morgan Stanley initiated coverage on the stock with an Underweight rating while Deutsche Bank also published new bearish coverage on Palantir stock with a price estimate of $35 per share, roughly half the current market price. High-profile fund manager Cathie Wood’s ARK Investment Management has also been offloading some of its holdings in the stock. The yields on U.S. Treasuries have also trended higher this week and this is typically a net negative for high-growth stocks such as Palantir. We’ve maintained that Palantir is a high-risk bet at this juncture for a couple of reasons, including its high valuation (over 150x consensus FY’25 earnings), its heavy dependence on government sales, as well as considerable insider selling in the stock. Here’s a closer look at what’s been happening with Palantir and the potential risks for the stock.

What Drove The 2024 Rally? 

Investors were drawn to Palantir’s success with AI-driven tools and significant government contract wins over the last year.  There is also optimism surrounding the Donald Trump-led Republican administration, which is expected to 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 lot of influence within the incoming administration. Additionally, Palantir stock was recently added to the Nasdaq-100 following the index’s annual reconstitution. There were reports that Palantir was 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. 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.

What Are The Risks Going Forward?

Despite several positive developments over the past year, Palantir stock faces some challenges. One key issue is the company’s mixed growth in the commercial sector via its Foundry platform which is designed for commercial customers in industries like manufacturing, retail, and healthcare. Although Palantir has emphasized that the commercial market offers a larger long-term opportunity, it is still very reliant on government sales, which are more unpredictable and irregular in nature. Over Q3 commercial-related sales expanded by 27% to $317 million, falling short of consensus estimates, while government-related revenues beat expectations. The company’s large contract sizes and complex, expensive implementations limit its scalability for small and mid-sized businesses. Additionally, Palantir faces competition from big tech giants such as Microsoft, which can leverage cross-selling opportunities, as well as specialized data analytics firms targeting niche markets.

The movement 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, 167% in 2023, and 340% in 2024. The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has comfortably outperformed the S&P 500 over the last 4-year 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 recovery?

Palantir’s valuation is also too rich, in our view. The stock trades at about 45x forward revenue and at more than 140x consensus FY’25 earnings. However, the company’s growth rates are pegged at just about 25% 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 31x estimated earnings for the next fiscal, even though revenues are on track to more than double in the 2024 year, with the consensus projecting over 51% growth for next year.  (Should you Buy, Sell, Or Hold Nvidia Stock?)

[1] Returns as of 1/10/2025
[2] Cumulative total returns since the end of 2016