Palantir Technologies (NYSE:PLTR) hasn’t fully recovered since pulling back with the overall market in late September. But PLTR stock has still managed to slowly move higher in recent weeks.
To some extent, this uptrend makes sense. After all, the “story” behind this stock remains intact. The company has continued to post strong revenue growth, thanks to the governmental and commercial contracts that it has won. As a result, the market has stayed bullish on PLTR stock.
Sure, the shares have not regained the levels that they reached in February, when the stock traded for as much as $45. But even at today’s prices, Palantir remains a prime example of “growth at any price” at its finest.
So where will the shares go from here? For the most part, that depends on the market’s next move. Inflation may ease, enabling the Federal Reserve to avoid raising interest rates sooner than currently expected.
Yet the heavy downward pressure that could affect growth names, including Palantir, far exceeds the potent1ial short-term gains of PLTR stock.
The Risk/Reward Ratio of PLTR Stock Looks Negative
Since inflation is not looking as “transitory” as the Fed had expected, it appears more likely that the central bank will raise rates in 2022 rather than 2023. As a result, the chances of a market correction, caused by faster-than-expected interest rate increases and the “tapering” of the Fed’s bond purchase program, remains high.
If the markets react negatively to the Fed’s shift from a dovish to hawkish fiscal policy, Palantir’s shares, like other growth stocks, could experience severe multiple compression.
Trading at a forward price–sales (P/S) multiple of 26 times and a forward price–earnings (P/E) ratio of 123.2x (based on analysts’ average 2022 projections), Palantir would still be richly-priced (relative to its projections calling for more than 30% annual growth) if it saw, say, a 50% decline in price.
Yet even if the stock market doesn’t go into meltdown mode due to an increase in interest rates (which is possible), the limited, near-term, potential gains of Palantir should keep you away from it at its current prices.
Palantir Has Little Potential
Since the markets can avoid a correction or crash, I’ll admit it’s not a lock that PLTR stock will soon drop dramatically. Yet there’s not much out there that can jolt it back to meaningfullyt higher price levels.
It’s clear from the stock’s extremely high valuation that the company’s high growth projections are more than baked into the shares.
Unless the company reports “blowout” third-quarter results on Nov. 9, it’s doubtful whether the market will be willing to give the shares a higher valuation.
Sure, limited near-term gains may not be the worst thing in the world. If the markets stay resilient and Palantir continues to grow like it’s had in recent quarters, the shares could continue to climb, albeit at a much slower pace than at the beginning of the year.
That said, don’t assume that Palantir’s high growth rates are guaranteed to continue in the coming years. As I noted in my last article on PLTR stock, two sell-side analysts have recently pointed out something that could mean trouble ahead for Palantir: a subdued flow of new contracts between the company and the U.S. federal government. That may signal that the growth of Palantir’s revenue from the government is at risk of slowing.
If Palantir’s commercial sales growth fails to pick up the slack, the company’s days of growing its sales by more than 30% may be numbered. No matter how the market is behaving, such a change in its “story” would most likely result in a big price drop by the shares.
The Verdict on Palantir
For now, worries about a collapse by Palantir’s shares may seem overblown, as the stock market continues to shrug off high inflation and possible interest rate increases. And the company’s sales still appear to be likely to grow at an above-average clip.
Yet both situations could soon change. A negative reaction by investors to monetary policy changes, which could sink growth stocks, remains possible. The risk of Palantir’s high rate of growth slowing down is rising as well.
Since the shares’ risk/reward ratio doesn’t seem favorable, you’re still better off avoiding PLTR stock..
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.