The problem for growth stocks that completely ignore fundamentals is that government money or animal spirits must support them. If either evaporates, the stock will have nowhere to go but down.

This may be the case for Palantir, a stock whose fundamentals are a tad off its price. (“Miss? What exactly is ‘a tad?’ In space terms, that's about half a million miles.” for you Airplane II fans out there.)

After falling 10.08% during the regular session and another 4.7% to $106.90 in after-hours trading yesterday, PLTR has given its first sell signal in months. (January’s was a false signal, as the stock nearly doubled since then.)

Defense Secretary Pete Hegseth has asked parts of the military to propose what could be cut as part of a potential 8% spending reduction for them over each of the next five years. Cumulatively, that’s a whopping 34% cut by the end of 2029. This kind of cut would be unthinkable without Elon taking a chainsaw to the waste, fraud, and abuse he’s finding with his DOGE team.

In this piece, I’ll review Palantir's case and explain why it may not be as strong as before.

Reviewing the Cantillon Effect

Richard Cantillon was an Irish-French economist and author of Essay on the Nature of Trade in General, a book William Stanley Jevons considered the "cradle of political economy.”

That book influenced reams of classical economists like Adam Smith. And his theories hold water to this day.

Cantillon effects are worth re-examining.

But first, let’s define the term.

The Cantillon Effect is the concept of relative inflation or a disproportionate price rise among different goods in an economy.

Richard Mayberry redefined these effects as “cones.” Fiscal or monetary stimulus can create cones, such as government spending in a particular place or industry or money printing around a specific location. 

Mayberry laid out the concept first in The Clipper Ship Strategy, one of his Uncle Eric books.

Mayberry notes that analysts and economists wrongly assume that the new money printed and the fiscal deficit spending are evenly distributed throughout the land.

Nothing could be further from the truth.

Instead, money is injected into specific locations, which he calls “cones.”

Mayberry writes, "The best way to invest is to look where the government is putting money and invest there."

To use his euphemism, they essentially “pour” the money into a city, a geographical area, or an industry.

Because of government largesse—just redistributed taxpayer funds—the stocks of the companies receiving subsidies, tax breaks, or direct investments will rise.

That was his entire theory in a nutshell, and it's exquisite.

This was my theory for why PLTR would be a good buy at $17. (But I sold at about $40, missing the last $80 of this rally. Stupid, stupid, stupid.)

The Case for Palantir

Peter Thiel, of PayPal and Facebook fame, is the chief investor behind PLTR. Alex Karp, an ace neocon lunatic, is its CEO. Karp is a true believer; he’s positively evangelical about America’s primacy in the world. PLTR started winning big government contracts and gaining considerable traction in defense. It also uses the magical “AI” term in everything it does, so investors are hot for it.

And it’s practically an axiom that America never cuts defense. So, PLTR stock took off. That’s why Hegseth’s move was such a shock.

Or was it?

Why the Military Spending Cuts?

Hegseth’s call for cuts should’ve happened decades ago. Perhaps the most wasteful organization on Earth is the U.S. military-industrial complex. USAID’s budget, you counter? That was only $32 billion in 2024. The Pentagon’s 2024 budget was $842 billion. I’ll do the math for you: that’s over 26 times higher.

If Hegseth gets his 8% per year cuts, the Pentagon budget will be cut by $286 billion by the end of 2029, nearly nine USAIDs. That’s where the actual fat is. Let me give you some recent examples of U.S. military boondoggles costing over $20 billion:

F-35 Lightning II – $1.7 Trillion Boondoggle

• Started: 2001
• Total cost: Projected $1.7 trillion (lifetime)

The most expensive military program in history, plagued by software bugs, high maintenance costs, and underperformance, continues to have readiness issues. Some reports show that only 50% of F-35s are mission-capable at any given time.

The F-22 Raptor – $67 Billion for an Underused Fighter

• Started: Early 2000s
• Total cost: $67 billion

It was developed as the world's most advanced air superiority fighter, but production was cut short to just 187 planes. Maintenance costs are so high that the Air Force often avoids using it in combat. Despite colossal R&D costs, it was retired from production in 2009.

Littoral Combat Ship (LCS) – $30 Billion for a Warship That Can’t Fight

• Started: 2002
• Total cost: $30 billion

Designed to be a fast, modular, and versatile warship, the LCS has been plagued by breakdowns, maintenance issues, and combat inefficiencies. The Navy has retired several LCS ships early, despite each one costing around $500 million. It was initially planned as a significant part of the U.S. fleet, but is now considered an expensive failure.

Zumwalt-Class Destroyers – $23 Billion for Three Ships

• Started: Early 2000s
• Total cost: $23 billion

Planned as a stealthy, high-tech destroyer, the Zumwalt program was originally meant to produce 32 ships. Due to extreme costs and underperformance, only three ships were built. Its advanced gun system was abandoned because the shells cost $800,000 each, making them too expensive.

Those were only from this century; I left out everything before 1999.

The defense budget could use some pruning. Since Palantir is part of that, it’s easy to see why the stock tanked overnight.

Moreover, everyone can take a breath and see PLTR’s outlandish fundamentals.

PLTR’s Fundamentals

Before you see PLTR’s numbers, sit down. Good. Let me preface this with a blast from the past, when Scott McNealy, CEO of SunMicrosystems, scolded analysts and fund managers for buying his overpriced stock.

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

McNealy complained about Sun’s stock trading at a price-to-sales (P/S) ratio of 10. (That’s the “10 times revenues” to start the rant.) 

What’s PLTR’s P/S? An eye-wateringly absurd 53.63. Investors are paying $53.63 for every $1 of revenue Palantir makes.

What’s PLTR’s P/E? 174.9. That means investors will pay $174.90 for every $1 profit Palantir generates.

PLTR's P/FCF is 230.30. Investors are paying $230.30 for every $1 of free cash flow generated by Palantir. Free Cash Flow (FCF) is the amount of cash a company has left over after paying for its operating expenses and capital expenditures (investments in equipment or buildings). FCF shows how much actual cash a company generates. FCF can be used for dividends, stock buybacks, or growth investments.

PLTR’s P/FCF ratio is over four times higher than the industry average of 53.60, suggesting impossible investor growth expectations.

Needless to say, that big red candle looks justified:

Wrap Up

As I write this, PLTR stock has recovered to $109.41 in pre-market trading. Palantir still intrigues me as a company, but it’s fundamentally overvalued, regardless of what the Pentagon does. However, since the Pentagon is PLTR’s sugar daddy, Alex Karp better grease the right palms, and the sooner, the better.

So Elon and his DOGE team aren’t hitting PLTR. They’re merely inspiring the Pentagon to hit PLTR, even if it’s inadvertent. And then investors sold PLTR… hard.

Still, the stock has had a fantastic run and may continue. That’s what investor sentiment and momentum do for stocks with unjustifiable valuations. Elon knows a bit about that, too.