As the meme stock trend again goes into hibernation, what’s next for Palantir (NYSE:PLTR) stock? As one of the higher-quality names chased by the Reddit set, its pullback following the June meme stock cycle has been modest.
In fact, don’t expect shares in the big data company to make another big move lower in the near term.
Sure, I continue to believe that Mr. Market is wrong in valuing this government contractor as if it’s a SaaS stock. But assuming it continues to impress investors with high growth, and the signing of new contracts with the federal government?
Valuation alone isn’t going to sink it. Unless of course, as I made the case back in June, if we see a sharp rise in interest rates sooner rather than later.
Conversely, the chances of it making another big move higher in the short term appear slim. Barring another meme stock wave, it’s doubtful we’ll see PLTR stock start taking a trip back toward the $30 per share price level. So, what’s the best move, with this high quality company trading at a rich valuation?
Hold off buying it.
The Story Behind PLTR Stock Remains Largely Intact
Chatter on platforms like Reddit’s r/WallStreetBets has fallen off. Yet despite the cool-down in hype, the story investors have in their minds about Palantir hasn’t really changed.
Analysts still project high levels of revenue growth in 2021 (around 35.6%) and 2022 (around 29.4%). Continued contract wins help to support the idea that the expansion of its bread-and-butter governmental business is far from plateauing.
These recent wins include two discussed by InvestorPlace’s David Moadel in his recent article on PLTR stock. Its advantages in obtaining government contracts continue to make up for its challenges in expanding its commercial book of business. With all this, investors remain willing to value it at a forward price-earnings ratio that’s well in the triple digits (152.3x).
Can this carry on? There is a possible change that could negatively affect its share price. Even if its days of high growth are far from over. That would be the risk it experiences multiple compression, due to higher interest rates. In other words, if Palantir sees its forward valuation fall from the triple digits it’s at today, back down to double digits. Even a compression to a still-premium forward P/E of 60x would mean a drop in its stock price from $22 to around $9 per share.
Then again, despite more indication that today’s inflation isn’t “transitory,” and that a rate hike is due, investors continue to shrug this off as much of a risk. This could continue, allowing PLTR stock to remain at or near current levels.
It May Hold Steady, But Don’t Count on Another Rally
If the current market and company-specific conditions hold, PLTR stock is at little risk of making a major move lower. However, that doesn’t mean you want to dive in and buy it. There’s little to indicate there’s much ahead to give shares a boost once again.
Sure, its next quarterly earnings release, set to happen before the open on Aug. 12, could contain something that helps to drive it higher. As seen in the preceding earnings release, we could see Palantir deliver results in line or above expectations, as well as up its guidance for the current quarter.
What does it really need to boost its stock price again? Another round of the “meme stock” enthusiasm that helped to send it on a parabolic run in February, and give it a relatively moderate lift back in June. Putting it simply, its traders chasing it on momentum that’s going to send it dramatically higher. Investors buying on fundamentals are OK with today’s valuation, but less keen on assigning it a higher multiple.
The takeaway? Moderate-to-low downside risk, countered by the high likelihood it at best trades sideways.
The Bottom Line
Putting my own spin on Warren Buffett’s “wonderful company at a fair price” maxim, you could call the situation here one of a “wonderful company, but at an inflated price.” With its status as the established provider of big data solutions for the U.S. government, Palantir’s has dug a deep economic moat for itself.
Its advantages in this area could mean it continues to grow, as government spending for these types of products/services continue to rise. Yet, that’s more than accounted for in this stock’s triple digit forward P/E multiple.
Its premium valuation could hold, if the low-interest environment stays as-is. The problem? Only meme stock traders are willing to pay more for it. As that trend has again gone dormant, there’s not much reason to buy PLTR stock right now.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.