Palantir Technologies (PLTR) has been on a tear in 2024, with its stock price skyrocketing over 150%. This surge has even outpaced the impressive performance of tech giant NVIDIA (NVDA), which has seen a 168% gain this year. This remarkable rally has pushed Palantir’s market capitalization close to $100 billion, a significant jump from its $37 billion valuation at the start of the year.
The recent stock price surge is largely attributed to Palantir’s inclusion in the S&P 500. This event was anticipated to draw substantial institutional investments, boosting the stock price. However, many investors expected a pullback following the initial euphoria. Contrary to these expectations, the stock has continued its upward trajectory, reaching levels considered overbought by technical indicators.
While long-term investors may dismiss any talk of selling Palantir at its current price, traders are increasingly questioning whether the stock’s recent surge warrants taking some profits. To understand the situation better, let’s delve into the fundamental factors driving Palantir’s valuation and the potential risks associated with its current price.
Palantir: A Case of Overvaluation?
Objectively speaking, PLTR stock appears expensive. Its price-to-earnings (P/E) ratio stands at a whopping 359.45, while its price-to-sales (P/S) ratio is 41.7, and the PEG ratio sits at 4.6. These metrics suggest that investors are projecting substantial future earnings growth, even exceeding the typical expectations for tech stocks. However, proponents of Palantir argue that there’s a distinction between price and value, and stocks like Palantir and NVIDIA can remain overvalued for extended periods before eventually catching up to their valuations.
Palantir’s Unique Advantage: Ontology
The high valuation may be justified by Palantir’s unique approach to artificial intelligence (AI). Its proprietary ontology, a system that structures and organizes data, makes large language models (LLMs) more effective. Essentially, Palantir’s ontology allows businesses to extract valuable insights from their AI investments. Without a well-structured ontology, AI systems often fall short of their potential value for companies.
As Palantir continues to secure contracts from both government and commercial sectors, it’s evident that many organizations recognize the value of its software. Furthermore, Palantir’s platform empowers its customers to leverage multiple LLMs, providing them with the flexibility to experiment with different models and explore their unique strengths within the same platform.
Insider Selling: A Cause for Concern?
Skeptics point to the significant insider selling of PLTR stock in recent months. While this activity might seem concerning, it’s crucial to remember that many of these trades were executed under Rule 10b5-1 trading plans. This rule allows insiders to plan trades in advance without any knowledge of future stock price fluctuations. Therefore, insider selling in Palantir’s case could be attributed to factors like compensation plans, which often involve stock grants, rather than an indication of a bearish outlook on the company.
Managing Risk: Options Strategies
For those comfortable with options trading, buying puts on PLTR with a longer-dated expiration could provide a hedge against potential price declines. This strategy grants the holder the right, but not the obligation, to purchase shares at a predetermined strike price if the stock falls below that level. If the stock price drops, buying shares at the lower strike price could help offset the impact of the decline on your average cost. If the stock price remains above the strike price, you can simply let the options expire, and your stock position remains unchanged.
A Personalized Decision
Ultimately, deciding whether to buy, sell, or hold Palantir stock is a highly personal decision that depends on your individual investment goals, risk tolerance, and time horizon. If you purchased shares at a lower price, taking some profits might seem more appealing. Conversely, if you bought shares at a higher price, holding onto them might be a more logical strategy, given the potential for future growth. However, it’s important to remember that past performance is not indicative of future results, and any investment carries inherent risks.
Regardless of your decision, staying informed and evaluating the company’s performance, market dynamics, and your own investment objectives is crucial to making informed choices. Remember, investment decisions should be made based on thorough research and a comprehensive understanding of your investment goals and the potential risks involved.
