After surging three-fold following the November U.S. elections, investors are starting to take profit with Palantir Technologies (NYSE:PLTR). Hitting prices topping $33 per share, Palantir stock has since slipped to around $25.60 per share. But while it’s starting to pull back, shares in this big-data play have more room to fall from here.
How so?
First, there’s the potential for retail investor speculation (which drove the rally) cooling down. Investors bet big the upcoming Biden administration will be a gold mine of opportunity for Palantir’s federal business. But now after the recent gains, many are starting to cash out.
Second, as I said on Dec. 21, the recent run-up could mean a mad dash of insider selling when the stock’s insider lock-up expires.
Third, while its prospects look bright, the jury’s still out whether Palantir can scale up as quickly as similar, but different, SaaS names.
Admittedly, shares aren’t guaranteed to head lower from here. Given how positively investors reacted previously to what could be considered small potatoes news, it may not take much to send shares well above $30 per share in the near term.
In short, while there’s clearly strong growth ahead for the underlying company, it’s been more than factored into its stock price. As the risk of shares heading lower exceeds the odds it rallies yet again, it’s still too early to buy the dip.
Palantir Stock: Growing Fast, But Overvalued
While I remain bearish on Palantir stock, I concede bulls on the stock are barking up the right tree. With revenues expected to climb 32% in the next year, and similar levels of growth projected in the coming years, I agree there’s a legitimate growth story here. The problem? Investors have overplayed their hand by bidding this up too far, too fast.
This was the key rationale behind Credit Suisse analyst Brad Zelnick’s recent “sell” rating on the stock. Setting a $13 per share price target, Zelnick sees “valuation disconnected from fundamentals.” With Palantir trading far above what he calls its “blue-sky scenario,” downside at today’s prices is massive.
Other reasons behind his downgrade? Potential challenges in signing new big-ticket deals, for one. Also, there’s the company’s upcoming insider lockup expiration (more on that later). But by and- large, the bear case for Palantir is one about valuation.
Sure, in 2020’s “growth at any price” market, valuation wasn’t much of a concern. Yet while that strategy worked quite well from March until now, that may not be the case in 2021. Especially for Palantir, which could quickly head below $20 per share in the coming months due to multiple factors.
Fast Headed Below $20
Right now, there may be enough retail investor enthusiasm to keep Palantir stock steady at today’s prices. But as I discussed, there are several factors that could push it below $20 per share in the coming months.
Namely, consider its popularity among the Robinhood trading community cools down after its incredible run. Unlike with hot sectors like electric vehicles, there isn’t a megatrend in motion for Palantir to give its recent rally additional runway. Sure, the upcoming Biden administration could bring a ramp-up in national security and defense spending on big data. But likely not to a degree dramatically above prior price estimates.
If Palantir fails to “crush it” come earnings time in the coming quarters, expect many of the stock’s recent buyers to head for the exits.
The other major downside risk? The upcoming lockup expiration. Palantir’s insider lockup expires once it releases full year results for 2020. Based on third-quarter earnings coming out on Nov. 12, I would assume Q4 results will hit the Street sometime in February.
A long-term issue with Palantir remains whether it can scale up like a commercial-focused SaaS company. Only time will tell whether the company will get to $6 billion in annual sales by 2028, or if its growth train will run out of steam long before then.
Don’t Try to Catch a Falling Knife
It’s still risky to go against the grain when it comes to Palantir. But, as I discussed, there’s plenty that could push shares lower in 2021. Whether that’s near-term issues, like a reversal in the Robinhood rally, or the upcoming lock-up expiration, Long-term concerns remain top of mind. Its ability to continue scaling up through the 2020s is questionable.
Put it all together and there’s more to drive Palantir stock higher rather than lower in the next 12 months. At lower price levels, risk/return may return in your favor. But right now, it’s still early to enter a position.
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.
