Palantir (NASDAQ: PLTR) was one of the biggest winners of 2024 on the stock market, delivering a monster gain of 341%.
Along the way, it reported accelerating revenue growth and improving operating margin in each quarter, and gained admission to the S&P 500.
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Thanks to its new artificial intelligence (AI) platform, the company has seen exceptional growth and profits. However, the stock market's winds suddenly seem to be shifting on Palantir.
The stock continued to charge higher through the first seven weeks of the year, jumping 65% with the help of a strong fourth-quarter earnings report. But since then, the stock has nearly given up all of those gains, even as there's been little news. Instead, a combination of macro factors, including weakening consumer confidence, worries about federal government budget cuts, and the intensifying trade war all weighed on Palantir stock.
It's becoming clear that Palantir has a lot to lose on an expanding trade war, and the stock is already looking like one of the first victims of Donald Trump's tariff plans. Keep reading to see why it could fall further from here.
Image source: Getty Images.
High-priced stocks tend to get hit the hardest in market corrections
The Nasdaq Composite has entered a correction, defined as a decline of 10% or more from a recent high, reflecting shifting investor sentiment.
Palantir was priced for perfection following its recent earnings report, and the macro environment suddenly looks far from perfect. Even after the recent pullback, Palantir trades at this writing at a sky-high price-to-sales ratio of 69, which is considerably more expensive than any other software stock of a similar market cap.
To put that valuation in perspective, Palantir stock could fall by another 50%, and most investors would still consider it very expensive. If the stock market sell-off continues, Palantir is likely to experience outsize losses.
The international business is already struggling
Trump's tariff threats ratcheted up geopolitical tensions and sparked some nationalistic fervor in parts of the world, including Canada and Europe. European defense stocks, for example, have soared, as it can no longer be assumed that the U.S. will protect Ukraine or the rest of Europe.
That's likely to make it harder for Palantir to grow its business in Europe, a market in which it's already struggling and European governments and companies are more likely to turn to homegrown solutions.
On the fourth-quarterearnings call management noted that revenue grew just 4% in Europe in the fourth quarter, making up 13% of revenue. The company's challenges in Europe and other international markets are only likely to get harder in the current geopolitical environment.
Federal budget cuts are on the menu
The U.S. government made up more than 40% of Palantir's revenue last year, and it's also been a significant source of growth.
The federal government is by far the company's most important customer, so budget cuts, imposed by the Department of Government Efficiency or the Trump administration's general push for slashing government costs, could be a problem for Palantir. The stock fell in February on reports that the Department of Defense planned to cut 8% from its budget in each of the next five years. The DoD is a major customer for Palantir.
Maintaining its strong growth rate from U.S. government revenue is not going to be easy in the current environment, and any signs of cutbacks are going to pressure the stock.
Palantir argued before that its software helps customers be more efficient, therefore saving money, but in the 2022 bear market, its revenue growth consistently decelerated. In uncertain economies, cautiousness around spending typically overpowers the cost-saving argument.
Expensive products tend to be cyclical
Software companies target different customers at different price points. But expensive products tend to be highly cyclical, and Palantir's software is not cheap. Palantir finished 2024 with 711 customers and brought in $2.87 billion in revenue. That means the average Palantir customer spent $4 million on its products in 2024. Even for enterprise-level customers or the federal government, these aren't negligible costs, and they're likely to receive scrutiny if economic times get tough.
Already, the threat of tariffs has forced a wide range of businesses to adopt a more cautious stance and weighed on consumer confidence. Spending on a software platform like Palantir might appear attractive in boom times to a lot of companies, but it's more likely to seem an unnecessary luxury when fears of a recession are already starting to drift through the market.
Palantir is still high-risk
It might be tempting to view the recent sell-off as a buying opportunity, but Palantir could still fall a lot further from here if the macroeconomic outlook continues to deteriorate.
The company established a strong competitive position in AI and with its deep data mining software platforms, but that's not enough to make the stock a winner at a time when it trades at a sky-high valuation, and macroeconomic uncertainty is sweeping the market right now.
The expanding trade war and weakening consumer confidence don't mean the economy is headed for a recession, but if those risks increase, Palantir is likely to feel it more than the broad market. With uncertainty seemingly on the rise, the pullback in Palantir stock could be far from over.
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Jeremy Bowman 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
