Palantir Technologies Stock Is Dropping Like a Rock. Should You Start Buying?

Palantir Technologies (NASDAQ: PLTR) got off to a red-hot start in 2025 and quickly registered gains of more than 60% in less than two months, hitting a 52-week high on Feb. 18, but it has been retreating rapidly since then.

More specifically, Palantir stock has shed 28% of its value since Feb. 18. The steep decline in Palantir's shares can be attributed to a combination of a potential reduction in the Pentagon's budget over the next five years and the possibility of CEO Alex Karp selling more than $1.2 billion worth of stock. It is worth noting that Karp sold close to $1.9 billion worth of Palantir stock last year, capitalizing on the stock's stunning rise in 2024.

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These developments have triggered a major correction in Palantir stock of late, and that's not surprising considering the expensive valuation at which this software and analytics provider has been trading. Moreover, Palantir's next quarterly report is more than two months away. Palantir's outstanding rally has been powered by its stronger-than-expected results and guidance in recent quarters, so there is a possibility that its slide may continue for the next few weeks on account of the negative sentiment.

But if that's indeed the case, will it be a good idea for savvy long-term investors to buy this hot growth stock? Let's find out.

A potential reduction in the Pentagon's budget isn't necessarily a bad thing for Palantir

A press release issued by the U.S. Department of Defense on Feb. 20 points out that the Pentagon's reduction will be aimed at "cutting fiscal fraud, waste and abuse at DOD while also finding ways to refocus the department's budget."

Defense Secretary Pete Hegseth points out that the Pentagon will refocus and reinvest existing funds into areas considered important by the Trump administration. What's more, areas such as missile defense, drone technology, and cybersecurity are unlikely to be impacted by the Pentagon's plan. A key reason Palantir stock has been plunging is because it gets a nice chunk of its revenue from supplying software and analytics solutions to government agencies.

In the fourth quarter of 2024, for instance, 55% of the company's revenue was government-related. Palantir has made its name by building and deploying software platforms for the U.S. intelligence community and the armed forces. So, it is easy to see why investors pressed the panic button following the Pentagon's announcement.

However, the Pentagon's focus on increasing efficiency as well as the continued spending on certain areas pointed out above could augur well for Palantir. That's because the company's Artificial Intelligence Platform (AIP) has been designed to improve the decision-making capabilities and the operational efficiency of both commercial enterprises and government agencies, which is why the adoption of this platform has strengthened impressively in recent quarters.

Moreover, Palantir's AI tools have been in solid demand from the U.S. armed forces, which have offered the company lucrative contracts in recent months. As a result, Palantir's government revenue grew at a faster pace of 40% in the previous quarter as compared to the 31% increase in commercial revenue. Moreover, Palantir management remains optimistic about the state of its government business given the current administration's focus on efficiency.

Responding to an analyst query on the company's recent earnings conference call, CTO Shyam Sankar remarked:

... [W]e sense a huge amount of fear among the traditional system integrators and providers here (the traditional providers of the monopsony), but we're pretty optimistic. And I think if you look at my comments over the past, even my recent Senate Armed Services testimony last week, Palantir's real competition is a lack of accountability in government. These forever software projects that cost an insane amount that don't actually deliver results, they're sacred cows of the deep state.

He went on to highlight Palantir's ability to deliver results at much lower costs, suggesting that the Pentagon's cuts may not hinder its prospects.

The commercial business has been growing at a solid pace

Palantir now has a thriving commercial business. Its commercial revenue increased impressively last quarter, and that trend is likely to continue as customers tend to expand their usage of AIP after signing the initial contract.

It is worth noting that Palantir's commercial customer count increased by 52% last year to 571, and an increase in spending by the new customers that it has brought on board could act as tailwinds for both its top and bottom lines. Additionally, the bigger deals that Palantir's customers are now signing with the company led to a 40% jump in its remaining deal value last quarter to $5.4 billion.

This metric refers to the total value of contracts that Palantir has yet to fulfill at the end of a quarter. The growth in this metric outpaced the 36% year-over-year increase in Palantir's top line last quarter, suggesting that it is landing more contracts now than it is fulfilling. So, investors would do well to focus on the bigger picture, as Palantir's prospects may not be affected by the Pentagon's proposed cuts.

Of course, the recent pullback has made the stock a tad less expensive, but it still commands a massive premium.

Data by YCharts.

However, it may be a good idea to accumulate Palantir stock if it continues to head lower in the coming weeks. After all, the company is one of the leading players in the lucrative AI software platforms market that's set for outstanding growth in the coming years, which could help Palantir justify its expensive valuation on the back of its robust unit economics.

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Harsh Chauhan 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.