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Shares of Palantir Technologies Inc. (NYSE: PLTR) tumbled 5.9% on Monday, closing at $80.79, as fears of a looming global trade war weighed heavily on Wall Street. While the tech sector broadly faced a sell-off ahead of former President Donald Trump’s anticipated tariff announcement on April 2—dubbed “Liberation Day”—Palantir found itself particularly vulnerable due to its heavy reliance on government contracts.
Trade War Fears Trigger Tech Sell-Off
The broader tech sector was under pressure, with the S&P 500 and Nasdaq Composite sliding 1.3% and 2.3%, respectively. However, Palantir’s outsized drop highlighted growing concerns about its exposure to federal spending cuts. Morgan Stanley Research analysts flagged Palantir as one of the software stocks most at risk for downward estimate revisions due to its significant dependence on US government contracts.
Palantir generates the bulk of its revenue from federal contracts, making it highly susceptible to potential government budget reductions. In fiscal 2024, federal spending accounted for $1.2 billion of the company’s $1.9 billion in total US revenue. With the military recently directed to identify $50 billion in potential program cuts for next year, fears of reduced federal IT spending have put additional pressure on Palantir’s stock.
High Valuation Adds to the Pressure
Beyond its government exposure, Palantir’s lofty valuation is also weighing on the stock. As of Friday’s close, Palantir was trading at 149.57 times its 12-month forward earnings—an eye-popping multiple compared to the S&P 500’s average of 20.16. This steep valuation makes Palantir particularly vulnerable in a risk-averse environment, as investors rotate away from high-multiple growth stocks.
The company’s volatility is another factor driving selling pressure. Palantir is classified as a high-beta stock, with a three-year beta of 1.8. This indicates that its price movements are nearly twice as volatile as the broader market. For context, Palantir ranks 19th in terms of beta among S&P 500 stocks, making it roughly as volatile as Tesla and Lam Research.
Morgan Stanley Lowers Expectations
Morgan Stanley analysts cited a “tone change” in their latest outlook for the software sector. While the firm previously expressed optimism about growing IT spending demand in the fourth quarter of 2024, they now acknowledge increased volatility and uncertainty.
The firm warned that software companies with large government deal exposure—such as Palantir—are at the greatest risk in the current environment. Instead, Morgan Stanley expressed a preference for companies focused on margin expansion and more resilient business models, highlighting Intuit, Workday, and Autodesk as safer bets. They also favor cybersecurity firms such as Fortinet and Palo Alto Networks, which are seen as more insulated from spending cuts and trade tensions.
Investor Sentiment Sours Despite Strong YTD Gains
Despite the recent sell-off, Palantir remains up more than 13% year-to-date, driven by strong demand for its AI-powered data analytics platforms. However, the stock has been on a steady decline since February, when news broke of potential military budget cuts.
Investors are now growing wary of Palantir’s high volatility and sensitivity to government spending decisions. With the upcoming tariff announcement and ongoing fiscal uncertainties, the stock is likely to face continued selling pressure in the short term.
Conclusion
Palantir’s sharp drop highlights the mounting risks facing government-reliant tech companies in the current macroeconomic landscape. With trade tensions escalating and federal budget cuts looming, the stock’s high valuation and volatility are making it a less attractive option for risk-averse investors. As Wall Street braces for Trump’s April 2 tariff bombshell, Palantir shareholders may need to buckle up for a bumpy ride.
