As quickly as a fast-moving stock can soar, it can come back down. That is what investors are learning today with Palantir (NYSE:PLTR). After an impressive rally last week, shares are down more than 15% this morning. So what is behind the slump in PLTR stock? And what else do you need to know?
To start, investors need to understand the recent narrative for PLTR stock. Essentially, the company specializes in all things Big Data, making it an appealing name in the software world. However, it is more important that Palantir is a leading name in the law enforcement, surveillance and defense industries. Why does this matter?
Although Palantir has faced more than its fair share of controversies, the company has been particularly hot in recent weeks. In fact, since Election Day, shares had gained nearly 90%. That is because President-elect Joe Biden offers shareholders great hope. Importantly, many investors are confident Biden will usher in a more stable era for military and defense companies. This should help Palantir shake off its ties to President Donald Trump and in a way, rebrand itself.
Additionally, many industry experts think that Biden in some way will cut back the overall defense budget. While this could hurt legacy players in the sector, it could be an upside catalyst for PLTR stock. As we wrote last week, as Palantir rebrands itself, its lower-cost solutions could stand out with a more budget-conscious U.S. Department of Defense.
Playing into that narrative, Palantir announced a new contract with the U.S. Army just last week. It has not released the value of the deal, but it will be working to modernize data management tools as part of a battlefield modernization plan.
Why PLTR Stock Is Sinking Wednesday
No amount of investor enthusiasm or post-IPO hype can keep Wall Street bears at bay, as we are learning this morning. Following the rally, Morgan Stanley analyst Keith Weiss downgraded his rating on PLTR stock. Weiss took his rating from “equal weight” to “underweight” and set a $17 price target. Compared to current prices, that implies more than 30% downside.
So why is Weiss so bearish? In his note, the analyst questioned the 155% post-IPO rally, noting that nothing had changed in the fundamental story for Palantir. Additionally, he raised questions over whether or not Palantir will be able to attract new customers and steady its financial ship. For example, the analyst asked whether operating expenditures for the year will hurt its growth prospects.
Well, nothing like some analyst scorn to send shares sinking. Today, look for investors to think critically about PLTR stock. Do they believe in the business model? Do they think aligning with Biden and a stable intelligence community is enough to draw in more customers? And what does a recent win with the U.S. Army mean for the bottom line?
Keep a close eye on the news. PLTR stock is likely to stay red hot for some time to come.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.