Why Now Is NOT the Time to Go All-In on PLTR Stock

Stock Market

Palantir Technologies (NYSE:PLTR) stock has surged nearly 140% this year because of strong earnings and rising AI interest.

The launch of ChatGPT in November 2022 boosted AI stocks, leading to a 64% year-over-year increase in AI mentions during Q1 2023 earnings calls as companies embraced AI opportunities.

Palantir’s stock surged after surpassing Q1 earnings expectations and gaining Ark Invest’s increased investment. However, this surge in the company’s stock price has raised some obvious concerns about overvaluation.

Let’s discuss why now may be the time to be cautious when it comes to Palantir, and other high-priced growth stocks of its ilk.

The Bearish View

Palantir reported its third consecutive profitable quarter in Q2 with $28M in net income. However, its earnings per share remain low because of a history of prioritizing growth over profitability, raising investor concerns.

Despite a 13% year-over-year revenue increase, costs have also risen, leaving margins unchanged. The company, despite government contracts, is not generating significant cash flow.

Palantir’s market reputation is appealing, but concerns linger. Richard Gardner, CEO of Modulus, highlights evolving AI regulations as a key uncertainty for AI software developers.

The future is uncertain because of AI advancements and potential regulatory shifts. As a key player in this space, Palantir has benefited from a surge in interest around AI.

However, it’s unclear how long this catalyst can sustain price appreciation for stocks associated with this tailwind.

Recent PLTR News

Besides the company’s key AI catalyst, Palantir stock also recently gained attention with a new deal alongside Babcock International, providing data-driven solutions to the aerospace firm.

PLTR’s partnership with Babcock involves real-time issue identification and utilizes deep data for military equipment monitoring, fostering a pioneering, modern defense era in the UK.

Following the news, PLTR stock traded roughly flat, but it should be noted that this stock has more than doubled on a year-to-date basis. Peak to trough, PLTR stock more than tripled at one point last month.

These sorts of catalysts can drive short-term moves, but investors are clearly taking a more cautious approach, evidenced by the price action of PLTR stock of late.

There Will Be More Headwinds

Palantir’s free trial sales model, aimed at showcasing product value, demands substantial resources for customer acquisition and raises global scaling challenges.

CEO Alex Karp’s belief in self-selling software, while effective in the government sector, hindered commercial sector customer acquisition.

Palantir’s acquisition strategy in 2021, involving early-stage companies, led to financial troubles and legal issues, proving unwise. The company ended its SPAC investment program in 2022, incurring over $300 million in losses from those investments.

What Now

Impressive technology doesn’t always translate into a good stock. Palantir’s high price relative to growth and risks is a concern.

Despite a 143% surge in 2023, PLTR stock is still 60% below 2021 highs, indicating its volatility. Considering management decisions, selling may not be such a bad idea right now. Indeed, no one ever got poor from taking profits after big surges.

Palantir’s stock could encounter obstacles ahead, partly because of its future guidance and profit-taking dynamics. For now, it’s a speculative stock to watch until it shows it can sustain its cash flow.

On the date of publication, Chris MacDonald 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.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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