The analyst community remains cautious. But Mr. Market by and large continues to bid up Palantir (NYSE:PLTR) stock.
Investors are bullish that the next few years will be boom times for the big data company. With its deep ties to the Biden administration, the company may see massive growth in its governmental business.
In addition, it may be showing signs of increased success in the commercial sector as well. It’s hard to deny this company’s growth potential. But at the same time, that by itself doesn’t make it a screaming buy at $36 per share.
Valuation concerns may remain on the back burner, as this “growth at any price” stock trades divorced of its fundamentals. But while so far its bears have been proven wrong, that could quickly change.
With high expectations priced in, any sort of stumble in the growth department could be enough to send this stock to prices significantly lower than it trades today. Insiders, who in a matter of days will be able to unload more of their shares onto the open market, may be unable to resist the temptation of selling into its runaway strength.
Put it all together, and risk/return looks highly out of your favor. PLTR stock’s epic run may not be over just yet. But once the music stops, you don’t want to be holding it.
PLTR Stock and Retail Investor Enthusiasm
As I wrote previously, the Wall Street sell-side community is growing increasingly bearish about PLTR stock. Namely, on the three concerns I have discussed in prior write-ups on this stock: valuation, decelerating growth concerns and the potential increase in insider selling.
On Jan. 20, William Blair analyst Kamil Mielczarek, initiated coverage on PLTR stock. Mielczarek is optimistic about the company’s near-term growth. But similar to the other analyst takes, he’s concerned about possible growth deceleration in the coming years.
Rating shares the equivalent to a “hold” rating, Mielczarek isn’t as bearish as others are. Yet, Wall Street’s caution on this stock could signal there’s limited room for shares to run, but plenty of room for them to fall.
So far, none of these concerns have made a dime of difference among retail investors. Still one of the top 100 most popular stocks on retail trading app Robinhood, the investing public hasn’t been afraid to pay up for this stock.
Nevertheless, it’s a matter of if, not when, the story behind this stock experiences a plot twist.
Will the Story Behind Palantir Start to Break?
Bears on PLTR stock can argue its overvalued until the cows come home. But for now, this remains a “meme stock.” That is to say, a stock with price action largely influenced by online hype.
This stock wasn’t as heavily shorted as some other names out there. But, thanks to its “meme stock” status, it saw an indirect boost from GameStop’s (NYSE:GME) recent epic short squeeze. Trading for around $26 per share on Jan. 21, shares briefly soared above $40 per share before pulling back as the dust settled.
As this continues to be a stock retail traders gamble on rather than invest in, it’s going to be tough for those looking to bet against it. But, at some point, this company’s growth story (which is largely backing up the retail enthusiasm) could start to break. The Biden years look to be golden ones for its governmental business. Yet, any sign its federal government-related growth is slowing down could have disastrous effects on shares.
Palantir’s recent multi-year enterprise agreement with mining giant Rio Tinto (OTCMKTS:RTNTF) may signal its commercial business is finally ramping up. However, it’s still early to tell whether it can finally move beyond its still big government-heavy book of business.
In short, with a high risk it falls short of expectations, those buying in today could get left holding the bag.
Market Irrationality Could Carry On
Valuation concerns and decelerating growth may be the top issues with PLTR stock. But don’t forget the potential negative impact of future insider selling.
As InvestorPlace’s Josh Enomoto wrote Jan. 29, insiders have already started to sell into the retail-investor driven strength. But, due to the lockup, they’ve been limited to how much PLTR stock they can unload onto the investing public.
However, once the company releases its full-year results on Feb. 16, said lockup will be lifted. This could mean a sudden ramp-up in the number of shares unloaded by the company’s principals and employees.
Will retail investor enthusiasm be able to soak up this incoming surplus of freely traded shares? It’s possible. But with shares trading at a frothy price-to-sales ratio of 39.5x, is it a risk you want to take?
Bottom line: remain cautious, even as PLTR stock maintains its “meme stock” status.
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.
