The selloff among stocks, growth stocks in particular, may be painful if you dived in heavily near the top. There is, however, a silver lining. With more possible declines ahead, names like Palantir (NYSE:PLTR) have dropped to far more favorable valuations. In the past six months, when the downturn began, PLTR stock has dropped by around 63%. During 2021, this data analytics software provider was a wonderful company at an inflated price. Now? It’s not exactly at a fair price, but it’s getting there.
Even at today’s significantly lower prices, it still appears pricey, trading for 53.5x expected earnings. A few months from now, though, it may finally reach a point where it’s at a more-than-reasonable valuation. How so? Assuming the Federal Reserve carries on with fighting inflation with higher interest rates, growth stocks stand to see more compression. This means a further reduction in Palantir’s forward valuation. Along with this, PLTR stock could see some downward pressure from its upcoming earnings release.
Even if it reports mixed results, like a revenue beat or earnings miss, it could still cause a negative reaction from investors. As my InvestorPlace colleague Mark Hake argued late last month, an earnings miss could cause shares to drop to around $7 per share. In short, it could soon reach a price where buying it is worthwhile. The main issue with the stock during its high-flier days in 2021 was that it should never have been valued like a software as a service (SaaS) stock.
Instead, it should have been valued more like a consulting firm, such as Accenture (NYSE:ACN), with a slight premium applied to account for its higher rate of growth. Accenture currently trades for around 27.7x earnings. Add a slight premium to that, and a 30x to 35x multiple may be a reasonable price for this stock. In other words, a drop to between $5.70 and $6.65 per share. This is based on expected earnings of 19 cents per share this year. That may be a valuation it could sustain, even in a rising interest rate environment.
If governmental growth remains steady, as Piper Sandler analyst Weston Twigg has said should happen, and if it continues to grow its commercial revenue at a rapid pace, as seen last quarter, assuming it bottoms out in the mid single-digits, PLTR stock may have the ability to make a solid recovery. With this in mind, until its next big drop happens, sit on the sidelines with 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.