Palantir (NASDAQ:PLTR) just flipped the script. After getting hammered by a 30% selloff, one of its most vocal skeptics, William Blair's Louie DiPalma, is changing his tuneupgrading the stock from Underperform to Market Perform. While he still sees downside risks, particularly from potential government contract delays, he's acknowledging the undeniable AI hype keeping Palantir afloat. The stock's valuation remains steep, trading at nearly 100 times next year's free cash flow estimates, but investors continue to give AI plays a premium. If the market shifts back to risk-on mode, Palantir could reclaim its previous highs.

That said, this ride is far from smooth. Palantir's heavy reliance on government contracts means that looming budget cutsor worse, a government shutdown on March 15could slam the stock even further. But here's the kicker: its software isn't just another expense, it's a tool that can help optimize spending. On top of that, Palantir is still in the mix for major military contracts, which could provide a much-needed boost. While volatility is expected to stick around, DiPalma sees the stock trading in a range rather than outright collapsing, signaling a shift in sentiment.

The real question now is whether Palantir can justify its premium valuation in a shifting market. AI euphoriafueled by OpenAI's recent $300 billion-plus valuationmight keep investors engaged, but if revenue growth slows, that sky-high multiple could come crashing down. A valuation reset to 40 times free cash flow isn't off the table if the fundamentals don't hold up. For now, Palantir is caught between AI-fueled optimism and the uncertainty of government spending, making it one of the most debated stocks on Wall Street.