Palantir (PLTR -10.30%) stock saw big sell-offs in Wednesday’s trading. The software specialist’s share price ended the daily session down 10.1% and had been off as much as 12.9% earlier in trading.
Palantir stock saw a pullback early in today’s trading following a disclosure yesterday that CEO Alex Karp plans to sell $1.2 billion in company stock. Sell-offs intensified late in the day’s trading following a report from The Washington Post that suggested big defense spending cuts could be on the horizon. According to the report, Defense Secretary Pete Hegseth has instructed Pentagon officials to prepare for budget cuts that could come in as high as 8% annually over the next five years.
With Karp laying the groundwork to move forward with a new stock-selling plan and the potential for Palantir to see weaker public-sector demand, investors got multiple bearish signals today. But even with the substantial valuation retreat, Palantir stock is still up roughly 360% over the last year.
Is Palantir stock a buy right now?
Even with today’s double-digit share price pullback, Palantir is still valued at roughly 203 times this year’s expected earnings and 68 times this year’s expected sales. With such a highly growth-dependent valuation, the stock probably isn’t a good portfolio addition for risk-averse investors or those without tolerance for high levels of volatility in the near term.
And while Palantir’s heavily forward-looking valuation opens the door for the stock to see big swings even on relatively little news, significant cuts for the U.S. defense budget could result in a material worsening for the company’s operating backdrop. On the other hand, it’s possible that an elevated focus on efficiency within Department of Defense (DOD) would actually create some positive demand catalysts for Palantir. For starters, there’s a fair chance that the company’s software will be used to identify the best areas to reduce spending. The company’s artificial intelligence (AI) software tools could also be used to automate tasks at the Pentagon.
Despite reports of possible DOD budget cuts, I think that Palantir’s outlook in the defense industry remains very strong. While the company’s growth-dependent valuation comes with a high level of risk, I expect that investors who buy shares at today’s prices and hold over a five-year period will see very strong returns — even if there’s a lot of volatility in between.
Keith Noonan 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.