It may may keep climbing.
Palantir Is the S&P 500’s Top Stock This Year. It May Keep Climbing.
Palantir continues to ride the AI wave. The stock has momentum and even short sellers are reluctant to bet against it.
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P alantir Technologies is Wall Street’s “it” stock of the moment. The defense contractor reported earnings and revenue last week that blew away forecasts and the artificial intelligence wave could also boost its business from commercial customers.
The stock is up nearly 55% this year, making it the best performer in the S&P 500, and Palantir CEO Alex Karp gave an incredibly bullish outlook during the earnings call with analysts.
All of that has given Palantir an almost cultlike following. Jerry Sneed, senior vice president with asset management firm Procyon Partners even compared Karp to Nvidia CEO Jensen Huang, calling them both geniuses. Procyon Partners owns the stock in client portfolios.
But can Palantir, which is near a record high, continue to soar? The stock trades at a heady valuation of more than 200 times earnings estimates for this fiscal year.
Wall Street analysts, typically a bullish bunch, are also skeptical. Just six of the 24
sell-siders who cover Palantir rate it a Buy, according to FactSet, compared with 13 Hold ratings and five Sell recommendations. The consensus price target is $88.38, more than 20% below its current price.
From a technical standpoint, though, Palantir still looks attractive. The stock is currently higher than its short-term moving averages and is also comfortably above longer-term moving averages as well, suggesting more upside ahead.
But it could be a bumpy ride.
Katie Stockton, founder of Fairlead Strategies, said in an email to Barron’s that Palantir is supported by positive short-term momentum, but noted the stock could lose ground over the next few weeks as gains consolidate.
“This could occur without any real damage to the long-term uptrend,” Stockton added.
To be sure, there are some who doubt the growth story. Palantir has attracted more than typical interest from short sellers—investors who hope to profit from a decline in a stock’s price by borrowing shares and selling them. The investors aim to pocket the difference in price if they are able to repurchase the shares at a lower cost before returning them.
Still, Palantir isn’t as popular an investment for shorts as you
think, given how much the stock has run up. Including this year’s gain, Palantir has skyrocketed more than 350% in the past 12 months.
According to S3 Partners, a research firm that focuses on short selling, only a little more than 4% of the available shares of Palantir were held by short sellers. The average level of short interest for most stocks is closer to 2%. But stocks that are big targets for short sellers tend to have short interest levels north of 20%.
Palantir isn’t a crowded short said researchers at S3 Partners in a report Friday, adding that “short positions have incurred record losses” because of how well Palantir has done.
In other words, bearish investors may be avoiding the temptation to short Palantir because they don’t want to get squeezed, which is what happens when a stock heads higher after good news and the short sellers have to rush to buy back the stock to cover their positions before they lose even more money. That seemed to be the case last week when Palantir’s stock soared 24% following its earnings report.
So even though Palantir is never going to look attractive to a value investor, it is hard to not own the stock if you believe it will continue to post phenomenal levels of growth for the foreseeable future.
It’s also worth noting that Palantir has consistently topped consensus forecasts for the past few quarters and analysts have had to continuously raise their earnings estimates as a result. That makes it more difficult to truly gauge what Palantir should be worth as well.
“The sell side is never going to get Palantir’s valuation right,” Procyon’s Sneed said, adding that even though Palantir isn’t cheap, investors shouldn’t be selling because they don’t get hurt by owning it.
That may be true for now. But after such a heady run, another fund manager said it isn’t a bad idea to take occasional profits.
Todd Walsh, CEO of Alpha Cubed Investments, said Palantir’s meteoric rise reminds him of the run that chip stock Qualcomm enjoyed in the late 1990s. Qualcomm hit a peak in 1999 and didn’t get back to those levels until more than 20 years later. That’s a reason why Walsh said he sells a little bit of Palantir every now and
then. He added that he’s happy to be wrong if it keeps going higher, but it is prudent to lock in some gains.
“When a stock becomes a phenomenon like Palantir, pat yourself on the back. Luck has been your copilot. You should pull some chips off the table,” Walsh said.
