Palantir Technologies‘ (NASDAQ:PLTR) rally amid the escalating tensions in the Middle East has revived its defense narrative, and the question is who is driving the stock this time?
Palantir shares has corrected by almost 30% from the highs achieved in early November, as retail enthusiasm cooled and momentum broke down.
With the escalating tensions in the Middle East, the defense theme has been revived, and the stock has found new support. However, the new buyers might be very different from the meme-era retail investors who had propelled the stock higher.
From Retail Darling to ETF Holding
Palantir’s business model has become increasingly aligned with institutional investors. U.S. government contracts, which account for roughly 42% of total revenue, grew 66% year over year in the fourth quarter. This, along with the defense and intelligence business, has also made the stock part of several defense ETFs.
Defense ETFs such as the iShares U.S. Aerospace & Defense ETF (BATS:ITA) and the SPDR S&P Aerospace & Defense ETF (NYSE:XAR) provide investors with exposure to the growing defense budgets, providing investors with indirect exposure to the U.S. government contracts. However, Palantir is not included as part of their portfolios.
If one wants to consider defense ETFs that hold Palantir, Global X Defense Tech ETF (NYSE:SHLD), Defiance Drone and Modern Warfare ETF (NYSE:JEDI) and U.S. Global Technology and Aerospace & Defense ETF (NYSE:WAR) are quite well diversified, while having meaningful exposure to Palantir.
But the company doesn't live in just one bucket.
The AI Crossover Trade
Palantir's data analytics and AI technology also earns it a spot in innovation-themed ETFs like the ARK Autonomous Technology & Robotics ETF (BATS:ARKQ) and the iShares U.S. Tech Independence Focused ETF (BATS:IETC). Notably, IETC holds more than 10% of its portfolio in Palantir.
Palantir's dual role as defense contractor and AI software company makes it a candidate for a wide range of ETF sectors that track its performance. Geopolitical stress can lift aerospace ETFs like WAR, while positive developments in AI technology might help growth-oriented ETFs.
A Stickier Shareholder Base?
Unlike retail traders who may be quick to change their minds, ETF owners tend to be more systematic. As tensions persist and U.S. government spending remains robust, Palantir seems to be transitioning from a speculative darling to a core institutional building block.
It is important to note here that despite strong revenue growth and contract wins, Palantir's valuation has been a persistent sticking point for investors. Looking at its multiples, forward price-to-earnings ratio as of March 2 was 113.64. This is another aspect where diversified sector ETFs can come in as a better way to gain exposure to the stock or its theme.
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