Continue to Exercise Caution When it Comes to Palantir Stock

Did Palantir (NYSE:PLTR) stock find its floor at price just under $20 per share? And, if so, can the data analytics play’s bounce back over the past few weeks continue? Yes and no. On one hand, last month’s pullback in hindsight may have more of a hiccup than the continuation of a move towards its $10 per share direct listing price.

Fears of rising inflation, and in turn, rising interest rates, which is bad for growth stocks, may have been what caused the stock’s brief drop below $20 per share. But, as investors start to shrug off these concerns, Palantir shares may have a path to soar back to $30 per share (and beyond).

On the other hand, it’s not as if the coast is fully clear for growth names like this one. The higher rates of inflation we’ve seen in recent months could be here to stay. If so, the Federal Reserve may end up having to raise rates, as recently feared. This could result in valuation contraction for this richly-priced “hot stock.”

Yet, that’s not the only thing that could knock shares down once again. Company-specific concerns, like slowing growth, could have a negative impact as well. So, what does that mean for investors interested in diving back in today? Stay cautious, as the recent rebound in hindsight could end being only a “dead cat bounce.”

Why Investors are Giving PLTR Stock a Second Chance

Enthusiasm for Palantir shares is still far away from hitting the off-the-charts levels experienced back in February. But, with its move from around $18 per share in mid-May, back up to around $23 per share today, it’s clear some investors are hopping in now, in hopes of getting in early for a second round of mania in this popular “meme stock.”

It’s understandable why investors are getting excited once again about PLTR stock. Revenue growth remains strong, as seen from its latest quarterly results. Its bread-and-butter governmental business continues to rack up contract wins as well. And, as InvestorPlace’s Chris MacDonald discussed Jun 1, the company’s talk about becoming exposed to Bitcoin (CCC:BTC-USD) has helped to boost interest in its shares as well.

All these factors point to shares holding steady, or even heading higher, from today’s prices levels. Yet, these factors will likely be enough (in the longer term) to counter the two still-looming concerns surrounding the company.

First, the still-present risk of valuation contraction. Second, the potential for the company’s growth to start falling short of expectations. Neither issue may be a top of mind concern immediately. But, if either one becomes more prominent in the coming months, it could be enough to knock shares down to prices well below $20 per share.

Valuation Concerns and Slowing Growth Could Still Sink Palantir

As I discussed last month, valuation remains a top issue with PLTR stock. Projections may call for it to grow at a 30% clip over the next few years. But, even this high level of growth may not be sufficient to justify this stock’s triple-digit forward price-to-earnings (P/E) ratio (157.9x).

Especially if last month’s inflation/interest rate fears come to fruition, and the Fed does a 180 with its monetary policy. Now, that’s not to say that, in the event of rising rates, Palantir experiences a dramatic valuation contraction. But, even a moderate contraction in valuation (say, a contraction down to a 100x projected 2021 earnings of 15 cents per share), could mean a nearly 35% move lower, back to $15 per share.

And, even if interest rate worries turn out to be overblown? The other main concern, possible slowing growth, could also produce a similar negative impact to the price of PLTR stock. If its commercial segment continues taking time to take off, and its governmental unit fails to pick up the slack, results in subsequent quarters could start to disappoint, instead of impress.

Putting it simply, the recent run-up is more likely than not the product of temporary hype. This by itself doesn’t guarantee shares will pull back from here. But, as the main concerns still remain on the table, there’s likely more in play to sink Palantir, rather than sending it soaring back to $30 per share, or even towards its past highs of $45 per share.

Instead of Chasing It, Tread Carefully

Admittedly, mania could still triumph in the short-term over Palantir. As seen with the madness playing out yet again with AMC Entertainment (NYSE:AMC), the Reddit set is still in control when it comes to “meme stocks.”

Renewed enthusiasm could carry on in the short-term. But, as the months progress, and fundamentals again become the driving force behind price action, the current rebound with PLTR stock could quickly reverse course. With this in mind, the best move may not be to chase it.

On the date of publication, Thomas Niel held a long position in Bitcoin. He did not have (either directly or indirectly) any positions in any other 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.