As I put it in late August, Palantir Technologies (NYSE:PLTR) stock seemed to be a situation where it would continue to stay strong performance-wise, that is, until markets get volatile. Now? Said volatility has started to play out. Shares in this hot big data play have slid back in price. With this, what’s next for PLTR stock ?
Chances are, it’s going to stay on its current (downward) trajectory. Mainly, due to the market factors that aided it this year are set to soon come to an end. As the monetary policies still in place today get pulled back? Investors are going to become increasingly hesitant to maintain a “growth at any price” philosophy.
That is, it’ll be near-impossible for Palantir to continue trading at a triple-digit forward price-to-earnings (P/E) ratio (145.2x at today’s prices). Yes, the Federal Reserve’s easy money policies aren’t the only reason why shares are up big over the past 12 months. Its impressive growth has also played a major role in the stock’s strong performance. Yet, despite strong results in recent quarters, revenue growth could be at risk of underwhelming in the months ahead.
With so much hype still priced-in at around $24 per share, the best move remains to steer clear. Only buy once it falls to a more reasonable price.
Possible Growth Challenges Ahead Facing PLTR Stock
The investing environment may be moving in a direction that’s not as favorable to PLTR stock. But it still has high growth to fall back on, right? Maybe, maybe not. Yes, it’s still locking down big ticket deals with the Federal government, like its recent win of a $823 million contract with the U.S. Army.
However, as Barron’s reported, some on the sell side have pointed out this deal isn’t as lucrative as it seems at first glance. Citi’s Tyler Radke argued that this deal is hardly a game changer. The structure of this contract (indefinite delivery, indefinite quantity) makes it tough to figure out how much it will ultimately be worth. Also, much of the money from this deal will flow to third-party suppliers/vendors instead of Palantir itself. William Blair analyst Kamil Mielczarek made similar remarks, noting that the stock’s initial spike on the news was unjustified.
Worse yet, both Radke and Mielczarek pointed to something that may mean trouble ahead for PLTR stock. That would be light deal activity when it comes to its business with the Federal government. Mielczarek in particular noted that the company didn’t win any new contracts last quarter, just extensions.
If this trend continues? Revenue growth from the governmental side could start to slow down in the quarters ahead. Perhaps to a point that counters any sort of commercial sales growth acceleration it may see going forward. Admittedly, it’s too early to say whether the growth train’s slowing down for Palantir. But it may be a sign there’s even less reason to buy into it, as it still sports a “priced for perfection” valuation.
Multiple Compression Remains Largest Threat
Am I making a mountain out of a molehill with regard to Palantir’s lack of new governmental contract wins last quarter? Perhaps. The Army deal, while seen by some as a small-potatoes deal rather than a game-changer, could be just the first of several new wins from the civilian and military agencies in Washington. With this, growth in line with expectations could carry on.
Even so, as I mentioned above, continual high rates of revenue growth may not be enough to save the day for PLTR stock. Not when richly priced names like it remain under threat of multiple compression. In other words, a reduction in its forward earnings multiple.
How far could Palantir fall due to a pressure on the forward P/E ratio? With a triple-digit P/E, even a high double-digit move lower would still make this a pricey stock. A lot will depend on how quickly the Fed pulls away the easy money. It also depends on how quickly it decides to bring interest rates back up to historical levels.
But whether rapidly, or a more gradual pace, these changes could send PLTR stock far below the $24 per share it trades for today.
Long Way To Go Before It’s a Reasonably Priced Buy
Down the road (assuming its high rate of growth carries on), Palantir could fall to a price where it’s a worthwhile buy. Perhaps at prices between $10 and $15 per share, where I recently predicted it could find its floor, if the stock market goes from merely drifting lower, to experiencing a full-on correction. For now, though?
Stay away from PLTR stock, as its downside risk continues to be far greater than its near-term upside potential.
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.