After more than doubling in the past month, is it too late to buy Palantir (NYSE:PLTR)? Palantir stock has soared since November. And, not only due to the U.S. presidential election; as I discussed a few weeks back, the company’s blockbuster quarterly results were another factor driving this big data company’s shares higher.
Investors who bought ahead of Wall Street yielded impressive gains. But don’t get FOMO over their fortuitous timing. Chasing the stock at today’s prices may not get you the same results.
Why? Not only are the company’s near-term growth prospects now more than priced-into shares. With its lockup period soon expiring, insiders will be able to cash-in on the recent run-up, by selling their Palantir shares on the open market.
Coupled with factors that could impact long-term growth, this stock’s late 2020 investor euphoria could reverse as we enter 2021. Sure, with retail enthusiasm behind it, it may be too risky to go short. Consider how much this stock rallied on what amounts to small potatoes news (more below). Simply put, this stock can remain irrationally priced for longer than you can remain solvent.
Yet, Palantir’s current “bubble mode” status is hardly a reason to buy. If you bought before Election Day, it may be time to cash in some of your chips.
Palantir Stock and Inflated Expectations
On Dec. 7, Palantir shares soared 21.3%. What was behind this move? News of the company extending a $44.4 million contract with the Food and Drug Administration. Yes, because of a deal that add little to annual revenue (currently at around $1 billion), the company’s valuation increased by about $8.9 billion!
This alone should tell you its rampant speculation, not improved fundamentals, sending shares higher. Sure, with the upcoming Biden administration, this company has a big opportunity to increase its federal government business. As InvestorPlace’s Sarah Smith wrote Nov. 25, even if defense spending takes a hit, don’t expect the Pentagon to skimp on Palantir’s less-expensive big data offerings.
Yet, while there’s growth potential here, it’s likely not to the degree that’s been priced into Palantir stock. As it stands now, shares trade at a price-sales ratio of 46.5. While cheaper than other hot SaaS stocks like Snowflake (NYSE:SNOW), that’s still a frothy valuation.
Even when factoring Palantir’s revenue growth, today’s share price looks inflated. If the company lives up to Wall Street projections for 2021, shares today still trade for over 35x estimated sales . When it comes to earnings, the company’s current valuation looks even more inflated.
Based on 2021 earnings estimates of 12 cents per share, Palantir shares sport a forward price-earnings ratio of 238.8. Granted, earnings are expected to climb by at least 40% over the next few years. But even that level of growth may not justify the current unsustainable valuation.
Lockup Period Expiration Could Send Shares Lower
What does its rich valuation mean for Palantir stock going forward? Yes, this popular stock still has retail investor enthusiasm on its side. Just like we’ve seen with EV stocks, speculators may “buy on the rumor, and buy more on the news.”
Yet, there are near-term and long-term factors on the horizon that could push shares lower in the coming months. First, the upcoming expiration of the insider lockup period. Sure, as this Seeking Alpha commentator discussed, insider selling once the lockup may not be a major concern.
Namely, due to the fact insiders inking to cash out could do so in the private market prior the company’s direct listing last fall. Yet, with the stock up nearly three-fold since its public markets debut, I’m sure there are many more insiders with a “bird in one hand is worth two in the bush” mindset.
But the specter of big-time insider selling isn’t the only reason to be cautious with Palantir as it nears $30 per share. As this analyst recently discussed, there are factors that could limit its ability to scale up over the long term.
Between its tailor-made products being less scalable, and its growth largely dependent on a ramp-up in defense/national security spending, there are solid reasons why this company’s growth train could run out of steam in the coming years.
Retail Enthusiasm May Prevail, But Now’s The Time to Lock-In Gains
While I’m taking a more cautious view on this stock, I concede that retail investor community’s continued love for Palantir could push shares even higher. As the “buy the rumor, buy more on the news” mentality prevails, it will take something like a big earnings miss or material contract loss to make its current trajectory reverse course.
Yet, with its shares richly priced, and the upcoming lockup period potentially putting downward pressure onto shares, those who bought Palantir stock at lower prices may want to sell now and take some risk off the table.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.