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Senate Control Could Determine Where Palantir Stock Heads Next

Although innovations in business applications have allowed worker bees to perform increasingly complex operations faster, they also created an irony: the massive amount of data production is increasingly making tech-driven functions less convenient but also impossible. Essentially, big data has made itself permanently relevant. But that suits companies like Palantir Technologies (NYSE:PLTR) just fine. In just the past few weeks, Palantir stock has roughly tripled in value.

Palantir Technologies (PLTR) headquarters
Source: Sundry Photography /

Of course, such meteoric success often attracts attention of opportunists of a different variety. Late last week, short-selling firm Citron Research had some choice words to say about Palantir stock. To paraphrase, the company sent out a social media post declaring that PLTR was no longer a security but rather a “full casino.” It believes that shares will sink approximately 33% as reality catches up to its meteoric rally.

There might be a point to Citron’s negative take. According to Business Insider, Palantir stock was a contrarian beneficiary to the 2020 presidential election. “Biden’s victory prompted speculation that the new administration would cut military spending. The Defense Department is already one of Palantir’s biggest customers, and budget cuts could drive more business to the company’s lower-priced software from traditional providers.”

However, this isn’t a clear-cut scenario. True, President-elect Joe Biden will face much pressure from the progressive ranks of the Democratic party to cut the defense budget. However, Reuters pointed out that “defense spending is unlikely to be cut since it supports countless U.S. jobs during the coronavirus recession.”

If defense spending holds, that might not help Palantir stock since defense agencies won’t have an economic incentive to break away from their long-seated relationships with incumbent contractors. Plus, we’ve got to remember that the Democrats had a disappointing outing in the election, losing seats in the House and leaving control of the Senate down to runoff races in Georgia, which have been making their own stock-trading headlines.

Before you make a decision on PLTR, it’s helpful to consider the broader economic picture.

Defense-Related Expenditures a Tricky Arena for Palantir Stock

Although I can appreciate the counterintuitive bullish narrative for Palantir stock if defense budgets end up being cut, I’m not entirely sure if that would benefit PLTR longer term. That’s because the Democrats may be crazy, but I don’t think they’re stupid. If reduced defense budgets end up compromising national security, they’ll destroy their credibility, which is already on tenuous ground.

Thus, for Palantir stock to have the most reasonable upside pathway, you want the pond to be bigger. Again, I’m not sure if the underlying company has the fundamental strength to go toe-to-toe with defense heavyweights if the sector becomes a game of musical chairs.

In this context, I believe investors should watch carefully the relationship of defense-related expenditures as a percentage of real gross domestic product versus the S&P Aerospace & Defense Select Industry Index. Over the past 10 years, the aerospace and defense index nearly quadrupled. In contrast, defense expenditures as a percentage of GDP fell from 5.31% to 4.46%. (FYI: That gauge is investable via the SPDR S&P Aerospace & Defense ETF (NYSEArca:XAR).)

Defense expenditures as % of GDP vs. Defense index
Click to Enlarge
Source: Chart by Josh Enomoto

Now, some of the decline is understandable as GDP growth took a hit due to the Great Recession. But nominally, defense expenditures only increased around 3% in the past ten years, from $828 billion to $852.4 billion. To me, this signals the possibility that the valuation of the aerospace and defense industry — which represents a sizable portion of Palantir’s revenue channels — is overcooked relative to its relationship with GDP.

Further, I’m getting very concerned about the novel coronavirus pandemic. We’re already at an extremely elevated level. Further, according to health experts, Covid-19 cases could skyrocket as millions of Americans traveled for Thanksgiving weekend. We could have multiple super-spreader events, which could wreak havoc on the economy.

I don’t want to get into a fear-mongering perspective. However, 778,000 people filed for unemployment benefits in the most-recent report, which was up almost 6% above economists’ forecast. More critically, the jobless claims are moving in the wrong direction, as they were at at 711,000 filings in the Nov. 7 report.

Should Covid-19 cases worsen, this implies that President-elect Biden must make a full-court press to help the American people. And non-economically accretive sectors like defense may have to absorb some cuts.

Wait for the Georgia Runoffs

Of course, defense hawks will argue that its’ un-American to even think about defense cuts, let alone going through with it. For better or for worse, the military industrial complex has succeeded in implementing a modern-day McCarthyism regarding the defense industry.

Though this is helpful to gin up patriotism, it gets in the way of having meaningful, necessary conversations about the costs and benefits of pursuing non-economically accretive endeavors (i.e., killing people isn’t profitable unless we take their land and resources).

However, we’re living in the new normal. For the first time in the modern era, millions of Americans turned to the government as their last hope in an hour of unthinkable desperation. Instead, Washington gave them the middle finger. It’s possible that the electorate returned the finger back by electing the people whom they did.

Therefore, the old rules about patriotism and military spending may not apply. The American people will not support a bloated defense budget until they can put food on their own table.

But the Georgia runoffs will really determine what the mindset is of the country, and what President-elect Biden can get away with. Before you make a big move on Palantir stock, you might want to wait until January.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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