UBS is staying neutral on Palantir Technologies (NASDAQ:PLTR) despite strong year-to-date performance, citing resilience in the company's fundamentals but cautioning about potential headwinds from shifts in U.S. federal spending.

The firm held its $105 price target, even as Palantir shares have jumped roughly 43% this year, ranking among the best-performing software stocks. Analysts led by Karl Keirstead noted that, given the current macroeconomic uncertainty, they're taking a closer look at the company ahead of its Q1 earnings report on May 5.

UBS spoke with six Palantir customers across both commercial and government sectors. Their takeaway: Palantir appears solid, with enterprise adoption continuing to grow and customer sentiment holding steady. However, they flagged delays in federal contract awards as a notable risk in the near term.

Commercial clients, including firms in auto, industrial, and manufacturing verticals, described their Palantir usage as essential, not discretionary. They cited benefits such as improved efficiency, cost savings, and alignment with key AI projects. Some customers also said Palantir's tools are helping them eliminate older tech stacks replacing data pipelines and visualization tools like Tableau a potential growth avenue against competitors like Informatica (NYSE:INFA) and Salesforce (NYSE:CRM).

On the government side, which accounts for about 55% of Palantir's total revenue, the tone was more cautious. UBS said delays in contract decisions are already playing out. Palantir itself has warned that U.S. government spending may lean more heavily into the second half of 2025.

A major factor behind this pressure is the Department of Government Efficiency (DOGE), a Trump-era initiative focused on streamlining federal budgets. While DOGE has increased total federal spending by $154 billion compared to the same period last year, it also cut costs in specific areas including layoffs of probationary staff and reduced foreign aid changes that could temporarily disrupt Palantir's deal flow.

UBS analysts also highlighted that 75% of Palantir's government-related revenue is tied to U.S. agencies, making it more vulnerable to shifts in domestic priorities. Still, they believe Palantir is well-positioned for the longer term, especially given its focus on AI and software as defense agencies shift away from hardware.

Due to these risks, UBS lowered its 2025 revenue growth estimate by 200 basis points to 31%, now aligning with Palantir's own guidance.