Stocks to sell

Don’t Chase the Next Palantir Stock Bounce Back

Palantir (NYSE:PLTR) stock may be starting to get out of its slump. Since February, the big data play, and Reddit favorite, has slid significantly from its highs. But, thanks to a strong earnings report, and a possible investment of company funds into Bitcoin (CCC:BTC-USD), shares have bounced back, after briefly falling below the $20 per share mark.

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In the near-term, this could continue. Shorts who bet against the stock at higher prices may be looking to cover their positions.

Those who missed out on the stock’s first epic rally may be tempted to jump in before it possibly takes off again.

But while we may see an additional near-term boost, don’t count on a continued rebound back to $30 per share, much less its $45 per share all-time highs. Why? Sure, with its impressive sales growth in the preceding quarter, for now this remains a growth story. But with this growth more than reflected in its valuation, Palantir continues to trade at prices that overestimate its long-term potential.

Worse yet is the specter of growth stocks like this correcting, an uncertainty that looms over the markets. As this continues to play a bigger role in price action, shares have already slid back below $20 per share as the market has absorbed the recent positive company-specific news.

PLTR Stock: Despite Strong Results, The Story Hasn’t Changed Much

How solid were this company’s recent results? After posting 49% revenue growth and topping estimates, the company now has something to counter the pessimism that’s been weighing down the stock since February. Along with earnings, the company also released guidance for the current quarter.

Again, these numbers came in ahead of analyst consensus. The results and guidance are certainly a positive for PLTR stock.

But it’s important not to get too excited about this news. By and large, the story hasn’t changed much for Palantir. Growth this year and the next may remain strong. Analysts numbers point to 34.1% revenue growth this year, and 30.7% revenue growth in 2022. But it’s questionable if it’ll continue to the extent still being priced into shares.

As I discussed in my last article on the stock, we may see its governmental business stall out sooner than expected. It’s possible growth in the commercial sector has been used to bolster the case that it can remain in “growth mode” much longer than the bears anticipate.

But, again, it’s uncertain this will be the case either. Even if it does continue its high levels of growth, that’s far from a guarantee of solid stock price performance going forward.

With growth stocks at risk of correcting further, the temporary pop we’ve seen in this stock in recent days could revert back to its prior downwards trajectory.

Palantir’s Still Vulnerable if Growth Stocks Continue to Correct

At today’s prices, PLTR stock trades for a forward price-to-earnings (P/E) ratio of 144.9x, and a price-to-sales (P/S) ratio of 18.1x. For the past year, investors have accepted the new normal of growth stories commanding such premium valuations. A near-zero interest rate environment has helped to keep this going. But even after the pullback in growth stocks since February, more declines may be just around the corner.

Treasury Secretary Janet Yellen has walked back comments about possible interest rate increases. But it was enough to start giving the markets a scare. This is clear from the performance of growth-oriented indices like the NASDAQ 100 — as measure by the Invesco QQQ Trust (NASDAQ:QQQ) — since the start of May.

With concerns about inflation and an overheated economy, investors have good reason to anticipate rising rates. Not only that, as former New York Federal Reserve President Bill Dudley discussed in a recent piece published by Bloomberg, markets could be in for an interest rate surprise.

If this pans out, stocks like Palantir, trading for triple-digit forward P/E ratios thanks to their high growth projections, may see a significant contraction.

And even if its high growth continues, shares could get stuck in neutral once they find a floor post-correction, similar to the “lost decade” of poor stock price performance experienced by big tech names like Microsoft (NASDAQ:MSFT) in the decade following the “Dotcom Bubble.”

Bottom Line: Don’t Chase The Bounce Back

Cathie Wood’s ARK Invest may be holding Palantir shares with diamond hands and adding to its position. But the risk of it getting sunk by a possible growth stock correction outweighs the chances that it continues to bounce back (even partially).

Depending on how things play out, growth stocks like this could be in for an additional correction. And even once it bottoms out, it could be years before it starts delivering strong returns for investors once again. So what’s the best move now with PLTR stock? Steer clear.

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

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.