WSJ op-ed questions whether Palantir and Anduril can avoid the cost-overrun traps that burned Boeing and Lockheed
Feb 11, 2025
Key Points
- Palantir's stock is up 300% over the past year while legacy contractors Lockheed, Northrop, and General Dynamics have stalled, driven by investor belief that Pentagon spending will shift toward software and drones.
- Recent fixed-price contract failures cost Lockheed $1.7 billion on missiles, Boeing $1.7 billion on the T-7A jet, and Northrop significant writedowns on the B-21, repeating a historical trap that has bankrupted contractors.
- Anduril and Palantir avoid the trap by iterating annual drone variants at scale rather than betting on single generational programs, but face risk if they chase monolithic contracts like the F-35.
Summary
A Wall Street Journal op-ed argues that Silicon Valley defense upstarts like Palantir and Anduril face a historical trap that has caught traditional contractors: the shift toward fixed-price contracts can bankrupt companies that bid aggressively or miscalculate costs, especially on large generational programs.
The op-ed frames a real market divergence. Palantir's stock is up 34% in a week and 300% over the past year, while Lockheed Martin, Northrop Grumman, and General Dynamics have stalled. Combined, the three legacy contractors are now worth less than Palantir alone. The piece attributes this partly to investor belief that Pentagon procurement will shift toward software, drones, and robotics under DOGE influence—a thesis that favors newer entrants.
The historical argument is the spine: cost-plus contracts, which reimburse expenses plus a profit margin, incentivized innovation but also bloated programs like the F-35. McNamara's total-package procurement in the 1960s swung the pendulum to fixed-price contracts; companies overbid and went bankrupt. The pendulum swung back multiple times. Today's shift toward fixed-price contracting is happening again, and the piece warns that Palantir and Anduril could fall into the same trap that has cost Lockheed, Northrop, and Boeing billions.
Recent evidence is stark. Lockheed reported a 72% drop in operating profit and a $1.7 billion charge on fixed-price missile contracts in Q4. Boeing took a $1.7 billion hit on the T-7A jet. Northrop wrote down the B-21 Raider program significantly.
The counterargument offered in the discussion is structural: the future of warfare is attritable systems—drone swarms, consumable platforms—not generational mega-programs. Anduril's Ghost platform is already cycling through iterations (Ghost 4 or 5). These products iterate annually, more like iPhone releases than F-35 development cycles. When you build 100,000 units per year with new variants annually, you can adjust pricing and manage costs without locking in fixed prices a decade out. There's less total capital at risk per contract, and shorter cycles reduce the chance of catastrophic miscalculation.
The op-ed's closer, quoting analyst Byron Callan, asserts that smaller players aren't immune to the same cost-overrun dynamics. The response is that this assumes the new contractors will chase large, slow, generational programs—which the market structure and nature of modern warfare make less likely. Software development cycles are shorter; the line between development and production is blurrier. A startup taking a $10 billion bet on a single fighter jet is reckless; betting on annual drone variants is not.
The real risk identified is self-inflicted: if Anduril or Palantir take on a monolithic program betting the entire company, they lose the structural advantages that make their business model work. Stay in the attritable-systems space where you iterate, and fixed-price contracts become manageable. Move into the F-35 space, and you face the same historical forces that have humbled every contractor before you.