Palantir stock has been a hot topic among investors. However, as we approach mid-2024, several reasons suggest it might be prudent to sell Palantir stock now rather than hold onto it.
As we approach mid-2024, investors in Palantir Technologies (NYSE: PLTR) are facing a critical decision point. Palantir, once hailed as a beacon of innovation in AI and data analytics, now presents a compelling case for selling, at least temporarily, given current market conditions and the company’s valuation metrics.
Valuation Concerns
Palantir stock has experienced significant volatility since its IPO in 2020, often driven by shifts in market sentiment regarding its growth prospects and valuation. Currently trading between $20 and $25 per share, the stock is considered by many analysts to be overvalued. The forward earnings multiple stands at around 70 times, which is exceptionally high even for a growth stock in the tech sector.
Analysts suggest that a more reasonable multiple, considering Palantir’s expected earnings growth trajectory, would be in the range of 30 to 40 times forward earnings. This implies a potential downside risk of over 50% if the stock were to undergo a de-rating to these levels.
Insider Selling Activity
Another red flag for Palantir stock investors is the recent pattern of insider selling. In May 2024, several key insiders, including co-founder Peter Thiel, sold substantial amounts of PLTR shares. This insider selling, totaling nearly $275 million in one month alone, can often be interpreted as a signal that those closest to the company believe the stock is currently overvalued.
While Palantir continues to demonstrate robust growth in both commercial and governmental segments, with recent highlights including a $480 million contract win with the U.S. Department of Defense, questions remain about the sustainability of this growth vis-à-vis its current market valuation. The company’s guidance for more than 20% revenue growth this year is promising, but the correlation between revenue growth and earnings growth, as forecast, suggests that significant profitability improvements may be further down the road.
Market Sentiment and Future Outlook
Looking forward, the market sentiment towards Palantir stock appears cautiously optimistic but tempered by realistic expectations. Analysts and institutional investors are keenly watching how Palantir performs against its guidance and whether it can consistently meet or exceed market expectations in the coming quarters. Any failure to do so could lead to a re-evaluation of its stock price, potentially triggering a downward correction.
Should you Sell Palantir Stock Now?
In conclusion, while Palantir stock remains a formidable player in the AI and data analytics space, the current market conditions warrant a cautious approach for investors. With valuation concerns, insider selling, and the need for sustained earnings growth to justify its current price, selling Palantir stock at its current elevated levels may be prudent.
Investors should consider waiting for a more favorable entry point, perhaps after a significant correction or when the stock reaches a more reasonable valuation based on its earnings potential. Timing the market perfectly is challenging, but exercising patience and diligence can mitigate risks associated with high-priced growth stocks like Palantir.
3 Stocks You Should Buy in Place of Palantir stock
If you’ve decided to sell Palantir stock, reallocating your investment into promising alternatives can be a strategic move. Here are three compelling stocks across different sectors that offer growth potential and diversification:
1. Chegg Inc. (NYSE: CHGG)
Chegg stands out as a transformative player in the education technology (EdTech) sector, positioning itself as a potential “next Palantir” due to its innovative use of AI in personalized learning solutions. Originally known for textbook rentals, Chegg has expanded into a comprehensive platform offering AI-powered tools for homework assistance and academic support.
Despite facing challenges like a 7% revenue decline in 2023, Chegg remains compelling for investors due to its strategic initiatives. The company’s high gross margins (projected to reach 74% in Q1) underscore its efficiency and potential for profitability growth. Moreover, Chegg’s shareholder-friendly policies, including a $200 million share buyback program, demonstrate commitment to enhancing shareholder value while navigating market fluctuations. As Chegg refines its operational focus, its pivot towards AI-driven education solutions could drive future growth akin to Palantir’s transformative impact in enterprise software.
2. UiPath (NYSE: PATH)
UiPath is a leader in robotic process automation (RPA), positioning itself as the “next Palantir” in office administration through AI-driven automation solutions. Cathie Wood, a prominent investor, recognizes UiPath’s potential, citing its ability to unlock and operationalize proprietary data for enterprises globally. This strategic advantage aligns with Palantir’s approach of leveraging data analytics to drive business insights and operational efficiency.
UiPath’s integration of Generative AI into its automation platform enhances its appeal among enterprises seeking scalable solutions for mundane processes. As businesses increasingly adopt digital transformation strategies, UiPath’s role in optimizing workflows through AI automation positions it favorably for sustained growth. Similar to Palantir’s evolution from government contracts to broader enterprise solutions, UiPath’s expansion into diverse industry verticals underscores its potential as a pivotal player in AI-driven office administration.
3. SoundHound AI (NASDAQ: SOUN)
SoundHound AI represents a promising contender in AI stocks, particularly in voice recognition technology. As AI applications extend beyond traditional sectors, SoundHound AI focuses on enhancing voice assistance in areas like restaurant operations and optimizing order flow through AI-driven interactions. Nvidia’s endorsement through significant investment underscores SoundHound AI’s potential growth trajectory, reminiscent of Palantir’s early-stage investments that propelled its market influence.
The voice recognition market, though niche, presents substantial growth opportunities as AI technologies evolve. SoundHound AI’s strategic positioning in this space, coupled with support from industry giants like Nvidia, enhances its viability as a future leader in AI-driven voice technologies. This alignment with Nvidia’s vision for AI innovation further solidifies SoundHound AI’s prospects as a key player, akin to Palantir’s emergence as a leader in enterprise AI solutions.
Final thoughts
In conclusion, selling Palantir stock in June 2024 appears prudent due to significant valuation concerns, market volatility, and the need for sustained earnings growth to justify its current price.
While Palantir remains a formidable player in AI and data analytics, waiting for a more favorable entry point or exploring promising alternatives like Chegg Inc., UiPath, and SoundHound AI could offer strategic diversification and growth opportunities amidst evolving market dynamics.
Also read: Top 3 Tech Stocks to Sell Before AI Bubble Bursts