Palantir Shares Plunge After Pentagon Announces Defense Budget Cuts

WASHINGTON, D.C. — Palantir Technologies Inc. experienced a significant drop in share price on Wednesday, October 18, 2023, amid reports that the Pentagon is preparing to slash the U.S. defense budget by 8% annually over the next five years.

The announcement was made following orders from Defense Secretary Pete Hegseth that directed senior Pentagon officials to develop and submit detailed plans for the budget cuts by this coming Monday. The proposed cuts come against the backdrop of a current defense spending budget of approximately $850 billion.

As a result of the news, Palantir’s stock closed at $112.06 per share, marking a decline of 10% on that day alone. The company, which specializes in data analytics and technology services for defense and intelligence agencies, has a market capitalization exceeding $255 billion.

In early February, Palantir reported $828 million in revenue for the fourth quarter of 2024, with adjusted earnings of 14 cents per share. However, the news of potential budget cuts has raised concerns about the future of government contracts that are critical to Palantir’s business model.

The Trump administration has been focusing on reducing government expenditures since former President Donald Trump began his second non-consecutive term earlier this year, having been inaugurated on January 20. As part of this effort, Trump appointed Tesla CEO Elon Musk to lead the newly created Department of Government Efficiency (DOGE), aimed at scrutinizing and potentially reducing defense spending.

During an interview on CNBC, Palantir CEO Alex Karp defended Musk amid criticisms over the proposed cuts. “What the progressive left should be doing is saying, ‘OK, Elon, you’re clearly the most qualified person in the world to do something like this. We want a dialog with you about what you’re doing, how you’re doing,’” Karp stated. He later noted, “I don’t believe that’s happened,” emphasizing the need for constructive discussions about the budgetary changes.

The potential cuts to the military budget could have ripple effects throughout the defense contracting industry, particularly for companies with a heavy reliance on government contracts. Industry analysts have expressed concern that significant reductions could slow technological advancements and increase unemployment in the defense sector, which currently employs over 2 million people across the country.

The defense sector has already faced scrutiny over costly legacy weapons programs, some of which have been criticized for their inefficiency and technological obsolescence. Lawmakers from both parties have raised alarms about the impact of budget cuts on national security and readiness.

Despite the anticipated challenges, analysts believe there could still be investment opportunities as the Pentagon increasingly shifts its focus towards autonomous systems and advanced technologies. Companies like Palantir may find themselves well-positioned to adapt to the evolving landscape of military acquisition.

As this situation develops, stakeholders in the defense sector are urged to closely monitor the implications of the proposed budget cuts and the ongoing dialogue within government circles regarding fiscal efficiency.