The Palantir Paradox
What do you do when two things seem so true, but their being true would make the other false? In walks Palantir.
Palantir has defied all notions of value investing. Peter Lynch and Benjamin Graham are rolling in their graves (Peter Lynch is alive; this was added for writing effect) as $PLTR has broken all of their pillars of investing. They are curenlty trading at a P/E- $451.35, Forward P/E-$199.05, and has surged surged over 173% year-to-date. Let’s break down the supposed paradox and see if there is a solution to this conundrum.
Bullish Sentiment
Simply put, PLTR has a large competitive advantage in AI integration that makes the large price tag justified. To skip the specifics, PLTR integrates AI into different parts of companies or entities (such as the U.S. government) so that they become more efficient in whatever task PLTR is directed toward. Overall, they are getting large contracts because they can directly reduce costs and increase their customers’ efficiency. Some have touted PLTR as recession-proof because a company will continue to work with the entity that is saving them money and increasing efficiency. To further this argument, PLTR is directly connected with the U.S. government—specifically the military—and we know under no circumstances would the U.S. government cut funding to its military.
Furthermore, PLTR has beaten the last eight earnings reports. Yesterday, Nov. 3, after the earnings release, CEO Alex Karp said, “These are arguably the best results that any software company has ever delivered… and that’s not hyperbolic.” Although uncommitted on “the best” results ever, he does have a point. He destroyed every Wall Street analyst sentiment and let them know. They continue to grow into the mold and expectations the public has given them and, until further notice, seem to be an immovable force that will continue to grow.
Bearish Sentiment
On this side of the debate, you’ll hear the same “AI is a bubble” talking points.
PLTR is trading at a P/E of 439.43 and a forward P/E of 194.20. According to many discounted cash flow analyses, its fair value is around $20 per share, suggesting the stock is roughly 90% overvalued.
In other words, all traditional financial valuation methods point to PLTR as an overvalued anomaly that screams, “Short the stock now!” This sentiment has even led the infamous Michael Burry to take a $900 million short position against PLTR, as revealed in his fund’s SEC filings.
What Should you do?
This is the million-dollar question, and it pertains to a lot of the tech giants that have growing price tags and are beginning to show signs of overvaluation. I believe this late in the game you are starting to see consumer sentiment tilt toward the bearish side of AI. Growth across the sector is shrinking as we enter a mini-bearish period to ease the fear in the market.
I think it is smart to size down positions and lower your risk. That does not mean exit this stock or adjacent companies. I just don’t think anyone has the magic answer, so using the limited knowledge and information available is the best we can do. Ease back and look for changes in charts, news, or investors that would bias you one way or the other. I think putting your eggs on one side of the seesaw is gambling, and sometimes the smartest thing to do is sit out for a while.
