Palantir Technologies, a data analytics company, has been experiencing significant stock price changes recently. After experiencing a sharp decline last week, the company’s stock continued to drop on Monday. The recent downturn can be traced back to a new initiative by the company’s CEO regarding share sales, as well as a report suggesting possible cuts in the U.S. defense budget. This has raised concerns among investors, especially since Palantir has a large portion of its business connected to government contracts. In fact, the company’s stock has fallen about 30% from its peak earlier in the month.
The situation is worrying because a decrease in defense spending could have serious consequences for Palantir, which enjoyed a 45% increase in revenue from U.S. government contracts in the last quarter. For context, the company reported a total revenue of $828 million, marking a 36% rise from the previous year and a 14% increase compared to the previous quarter.
Despite the recent drop, Palantir’s stock has seen massive growth over the past year, rising almost 300%. Currently, it trades at around 490 times its historic earnings, and approximately 190 times its projected future earnings. In comparison, companies on the Nasdaq Composite Index average a price-to-earnings ratio just below 42, which is more than one-third higher than the historical average for that index.
Michael Rechenthin, who leads research and development at Tastylive, a platform for options traders, mentioned earlier this month that while Palantir’s revenues and profits have been rising consistently, they have not been increasing at the same rapid pace as its stock price. This discrepancy could pose challenges for the company moving forward.
In previous years, particularly in 2021 and 2022, Palantir’s business with the U.S. government saw a noticeable slowdown in revenue growth, leading analysts to worry that a similar situation could occur again. If such a decline happens, it could lead to a decrease in the company’s valuation, as highlighted by analysts from William Blair, who were cited in reports.
Even in the absence of alarming news, Palantir’s stock had been valued at exceptionally high levels. Investors seemed to be becoming fatigued with the stock’s performance, and it was anticipated that the rapid rise in price was likely to slow down. Bob Lang, the founder of Explosive Options, pointed out earlier this month that the stock is not impervious to market realities and cautioned that the increases might not be sustainable.
In summary, while Palantir Technologies has shown impressive growth and strong revenues, the looming potential cuts in defense spending and the performance of the stock relative to its earnings raise questions about its future. Investors are watching closely to see how these factors will play out in the market.