Is Now the Time to Diversify from Palantir into Better-Valued Defense AI Rivals?

The defense AI sector has emerged as one of the most dynamic and speculative corners of the market in 2025, driven by geopolitical tensions, technological breakthroughs, and surging government spending. At the forefront of this boom is Palantir Technologies (PLTR), whose stock has surged to record highs on the back of landmark contracts and AI-driven growth. However, its valuation metrics-trading at a P/E ratio of 417 and a P/S ratio of 116-have sparked debates about whether the company is overextended relative to its peers. For investors seeking valuation arbitrage opportunities, the question arises: Is it prudent to diversify into better-valued defense AI rivals like C3.ai, BigBear.ai, or Anduril Industries?

Palantir's Valuation: A Double-Edged Sword

Palantir's meteoric rise in 2025 has been fueled by its dominance in defense AI. The company's market capitalization now exceeds $400 billion, rivaling traditional defense giants like Lockheed Martin and Northrop Grumman, according to a Techsouq report. This valuation is underpinned by a robust pipeline of contracts, including a $10 billion U.S. Army deal and a $1.5 billion partnership with the UK Ministry of Defence, per the same Techsouq report. Additionally, Palantir's Artificial Intelligence Platform (AIP) has driven a 63% year-over-year revenue surge in Q3 2025, with full-year revenue guidance raised to $4.39–$4.4 billion, according to a TradingView analysis.

However, such exuberance has drawn skepticism. Michael Burry's Scion Asset Management has bet $912 million against Palantir through put options, citing concerns about a valuation bubble, per the Techsouq report. At 100× forward sales and over 200× earnings, Palantir's multiples are arguably unsustainable unless its revenue growth accelerates dramatically.

Sector Comparison: Where Do Rivals Stack Up?

To assess valuation arbitrage potential, it's critical to compare Palantir with its peers.

1. C3.ai (AI): Despite being a pioneer in enterprise AI, C3.ai faces significant headwinds. Its stock trades at a P/E ratio of 28 and a P/S ratio of 12, with a market capitalization of ~$15 billion, according to a Yahoo Finance article. However, the company's fair value is estimated at $14.67, suggesting it may be overvalued by 5.8%, per the same Yahoo Finance article. Recent preliminary financial results and leadership challenges have further eroded investor confidence, making it a high-risk, high-reward play.

2. BigBear.ai (BBAI): This smaller player has surged 285% year-to-date, with a stock price of $6 and a market cap of ~$2.4 billion, according to a Techsouq report. Its P/E ratio of 35 and P/S ratio of 8 are far more conservative than Palantir's. BigBear.ai has secured niche contracts, such as its veriScan biometric system at Chicago O'Hare Airport and a partnership with Tsecond for battlefield AI, but its scale remains limited.

3. Anduril Industries: Valued at over $20 billion, Anduril is a rising star in defense AI, specializing in autonomous weapons and drone systems, per a Wral Markets report. While specific valuation metrics are unavailable, its focus on agile, software-centric solutions positions it as a long-term competitor to Palantir.

Growth Potential: Palantir vs. the Field

Palantir's growth trajectory appears robust in the short term. Analysts project 78% annual EPS growth in 2025 and 43% in 2026, according to the TradingView analysis, driven by its AIP platform and strategic partnerships with Boeing and Nvidia. However, its valuation leaves little room for error.

In contrast, C3.ai's growth is clouded by operational challenges, while BigBear.ai's potential hinges on scaling its commercial footprint. Anduril, though less mature, benefits from a more flexible business model and a focus on niche defense applications.

Valuation Arbitrage: A Strategic Diversification Play?

For investors wary of Palantir's stretched multiples, diversifying into better-valued rivals could offer downside protection. C3.ai, for instance, trades at a 90% discount to Palantir's P/S ratio and has a more diversified customer base. If its recent setbacks stabilize, it could present a compelling entry point. Similarly, BigBear.ai's lower valuation and exposure to defense AI trends make it an attractive satellite play, albeit with higher volatility.

However, caution is warranted. The defense AI sector is still in its infancy, and even "better-valued" companies face execution risks. For example, C3.ai's recent revenue guidance cuts highlight the sector's unpredictability, according to the Yahoo Finance article.

Conclusion: Balancing Exuberance and Prudence

Palantir's dominance in defense AI is undeniable, but its valuation reflects a high degree of optimism. While the company's growth story is compelling, investors seeking to mitigate risk may find value in diversifying into peers like C3.ai or BigBear.ai, which offer more conservative multiples and exposure to the same secular trends. That said, the sector's volatility and unproven business models mean that any diversification strategy must be approached with rigorous due diligence.

As the defense AI landscape evolves, the key will be to balance conviction in market leaders with tactical exposure to undervalued innovators.