Over the last year, shares of enterprise software company Palantir Technologies (PLTR 1.18%) have climbed by as much as 408%. While this suggests overwhelmingly bullish sentiment toward the company, more recent trends show a different picture.

From Feb. 14 through Mar. 3, Palantir stock fell 33%. Let's explore what drove that sell-off and assess whether savvy investors should buy the dip.

Why is Palantir stock falling?

There are only so many reasons investors may choose to sell a stock. For example, they may be locking in their gains following Palantir's historic performance in 2024, or they could be trimming their positions to raise capital prior to tax season.

But Palantir's rapid decline came on the heels of an announcement from the White House. Specifically, President Trump ordered Secretary of Defense Pete Hegseth to work with leaders at the Pentagon to identify areas where the defense budget could be trimmed.

Given Palantir's largest customer by far is the U.S. government -- specifically, various defense and intelligence agencies -- investors saw the prospect of defense budget cuts as potential trouble for the company. While I can see why investors reacted negatively to this news, the sell-off is misguided.

Image Source: Getty Images.

Why the Palantir sell-off is misguided

In my view, there are three big reasons Palantir's 33% drawdown has been unwarranted.

The first revolves around big tech's work with the defense sector. Back in 2019, the Department of Defense created a program called the Joint Enterprise Defense Infrastructure (JEDI). At its core, this was a cloud infrastructure deal that was rumored to be worth up to $10 billion over the course of 10 years. Hyperscalers including Microsoft, Amazon, and Alphabet, as well as enterprise software giant Oracle, bid on the contract.

However, after some controversy around the bidding process, the Pentagon ultimately scrapped the entire contract in 2021.

The Defense Department then created a new, similar program in 2022 called the Joint Warfighter Cloud Capability (JWCC), and it awarded the contract jointly to all four of the companies above.

Data by YCharts.

As the graph above illustrates, from the time news broke regarding Trump's desire to cut the U.S. defense budget to the end of February, Palantir stock has seen much steeper losses than these four major tech companies with Pentagon contracts. The slide that big tech has been experiencing lately is likely due to hyperscalers' capital expenditures, not the President's plans for the Pentagon budget.

This leads to what I see as the second thing putting pressure on Palantir stock. While the giants of big tech do a meaningful volume of business with public sector clients, they are far more diversified enterprises.

Palantir is regarded as primarily a government contractor. However, consider the chart below.

Data source: Palantir filings.

Palantir still derives more than half of its revenue from the public sector -- a category that includes clients other than the U.S. government. But it has made strides over the last few years in its efforts to attract private sector clients. U.S. government revenue increased 45% year over year in the fourth quarter, and yet, the U.S. commercial segment still came out ahead with 64% growth.

Finally, nothing specific has been decided about U.S. defense cost cuts yet. Some media outlets are reporting that the Defense Department has been told to find ways to reduce its budget by 8% annually -- roughly $50 billion per year -- so the money can be routed to President Trump's other priorities. However, there is also some chatter that the Pentagon won't necessarily be cutting its total spending but reallocating money from projects that are less related to the military's core mission to projects that are. If that turns out to be the case, I don't see quite as much risk for Palantir.

Should you buy the dip in Palantir stock right now?

Even though Palantir shares have cratered, the company's valuation remains extraordinarily elevated, even when compared to other high-flying software growth stocks.

Data by YCharts.

Still, this is a stock that doesn't experience such pronounced selling very often. For investors who remain bullish on Palantir's long-term prospects despite the looming threat of cuts at the Pentagon, this sell-off presents an attractive opportunity. That said, a careful approach, such as a dollar-cost averaging strategy, remains advisable.