Buy The Dip In Palantir Stock?

Palantir Technologies stock (NASDAQ: PLTR) has seen a slight sell-off, falling by about 16% over the last three weeks. While Palantir still remains up by over 2x year-to-date, there are a couple of concerns for the stock, which has been buoyed by surging interest in generative AI and a wave of new government contracts following the re-election of Donald Trump as U.S. President. Here’s a quick overview of what’s new with Palantir.

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Earnings momentum has also been strong: Palantir recently delivered a beat-and-raise quarter, with Q2 revenue growing 48% year-over-year to over $1 billion. The company raised its full-year revenue guidance to between $4.14 billion and $4.15 billion, up from its earlier forecast of $3.89 billion to $3.90 billion. Adjusted operating margins stood at 48%, up from 37% in the year-ago quarter. But that strength is exactly why the risk is also underappreciated. When expectations are sky-high, the fall can be steep. See How Palantir stock falls to $80

Rate Cuts, Overheated AI Market

The Federal Reserve has hinted that interest rate cuts could be coming in September. Although this should ideally be a net positive for high-flying AI software stocks such as Palantir, it hasn’t panned out this way as more small-cap names – which appear relatively undervalued  –  have been rallying amid anticipated rate cuts. The markets are likely betting that lower cost of capital and a possible boost in consumer spending led by the cuts could help smaller companies. Nvidia stock, too, remains down by almost 7% over the last few weeks.

Separately, Sam Altman, CEO of AI bellwether OpenAI, recently stated that the current artificial intelligence market could very well be in a bubble. He believes that investors are currently “overexcited about AI,” much like the dot-com bubble of the late 1990s. Although Altman still believes AI is a monumental technological development that will ultimately bring considerable economic value and innovation, the comments should likely give investors some pause.

Risks To Government Contracts, Scaling Commercial Business

Palantir has posted strong growth, particularly in its U.S. government segment, which saw revenue rise 53% year-over-year to $426 million over the last quarter. However, this momentum comes with risks. Government contracts tend to be lumpy and unpredictable, making future growth harder to forecast. With a heavy reliance on federal contracts, shifts in government priorities, budget cuts, or contract losses could meaningfully impact its revenue trajectory and weigh on the stock.

Palantir’s long-term growth depends on the commercial market, which the company caters to via its Foundry platform. While the commercial business has seen traction, there could be headwinds. The company’s ticket sizes are typically large, and implementation is complex and expensive, meaning that the product may not scale as well with small and medium-sized firms. Scaling Foundry beyond large enterprises could require a different go-to-market approach – one that Palantir isn’t built for today. This could impact growth in the longer run.

High Valuation

Palantir Technologies’ Revenues have grown at an average annual rate of 24% over the past three years, well above the S&P 500’s 5.2% growth. But even that impressive performance doesn’t justify the stock’s current valuation. The stock trades at roughly 90x FY’25 revenue and roughly 245x FY’25 earnings – multiples that leave little room for error. Moreover, high-multiple growth stocks often falter during economic slowdowns, as lower earnings growth leads to sharp contractions in valuation multiples. In downturns, markets rotate toward safer value stocks, and Palantir clearly does not fit that mold.

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