It's been a weird year for Palantir Technologies (PLTR -10.73%) stock so far. Two months into 2025, Palantir shares gained nearly 7%. This handily outperforms the S&P 500 and Nasdaq Composite, which lost 2% and 6%, respectively. If you were to take that data at face value then you'd think Palantir is having a good year.

However, there is more than meets the eye regarding these returns.

During the month of February, Palantir stock had gained as much as 51%. But guess what? Shares only ended the month roughly 3% higher compared to January.

Below, I'm going to dig into what influenced a near-30% sell-off in Palantir stock over the last couple of weeks. In addition, I'll explain why I think the ongoing sell-off is an opportunity to buy the dip in one of the highest-profile growth stocks leading the artificial intelligence (AI) revolution.

There are some major changes going on at the Pentagon

Palantir develops a suite of AI software platforms called Gotham, Apollo, and Foundry. The company sells its products to both the private and public sectors. However, as it stands today, more than 50% of Palantir's business comes from the government -- particularly, the U.S. military and other defense agencies.

Recently, President Donald Trump made it clear that he wants to see changes at the Department of Defense -- in particular, he has his eyes on the Pentagon's budget. While the exact details are somewhat fluid, media reporting suggests that Defense Secretary Pete Hegseth has been ordered to find budget savings of 8% annually (or roughly $50 billion) over the next several years.

Palantir investors were not pleased by this news, and hence, a pronounced sell-off took shape.

Image source: Getty Images.

Hegseth just dropped some interesting breadcrumbs

Back in 2020, the DOD implemented a strategy called the Software Acquisition Pathway (SWP). According to publicly available documentation from the DOD, the purpose of the SWP is "to provide for the efficient and effective acquisition, development, integration, and timely delivery of secure software."

According to media outlet Breaking Defense, Hegseth has proposed doubling down on the SWP strategy as the Pentagon overhauls its budget.

Palantir could be a major beneficiary of this initiative

One of the nuances to point out regarding the Pentagon's budget changes is that the 8% savings aren't necessarily all going to be outright reductions. It's been reported that one of the goals of this initiative is to identify areas within the budget that are deemed non-essential to military operations and reallocate those dollars toward defense protocols. For this reason alone, I think the sell-off in Palantir stock is overly pronounced -- as there isn't any explicit evidence that the Pentagon is looking to part ways with the company.

Moreover, given Hegseth's SWP vision, I'm actually cautiously optimistic that Palantir could expand its relationship with the military during this budget overhaul process.

One of the lesser-known product offerings at Palantir is a platform called FedStart. FedStart is a software-as-a-service (SaaS) tool that helps companies achieve necessary accreditation standards required to deploy software within federal environments more efficiently. From there, companies can integrate their software with Palantir's Apollo platform and get up and running across the government.

In my eyes, FedStart could be a major catalyst for the SWP process -- meaning that Palantir could be in a position to witness surging demand over the next several years as the DOD refines its budget. If anything, I think Palantir's existing relationship with the military could be deemed a valuable asset -- giving the company a launchpad to expand its infrastructure across the defense sector and accelerate growth.

For these reasons, I think savvy investors may want to consider buying the dip in Palantir stock right now.