Summary
Palantir's stock is detached from reality as it trades at an irrationally exuberant price.
The rise of macroeconomic risks makes it possible for the company to lose its growth momentum and for the stock to decrease in value.
We have recently opened a short position in PLTR.
Palantir Technologies
We recently opened a short position in Palantir as we believe that the downside for its stock is significant. Last year we closed our previous short position at a loss and said in our latest article that while Palantir is greatly overvalued, we would wait for the right time to reopen the position. It was the right call to make, since Palantir's stock is currently up over 15% after our latest article was published.
However, we also believe that the time to act again has come. In this article, we will present three major reasons why we're shorting Palantir, the risks to our short position, and our action plan under different scenarios.
Reason To Short Palantir #1: The Stock Price Is Detached From Reality
If we look closely at the performance of Palantir's stock in 2024, we will see that its rise in the second half of the year was fueled by positive Q2 and Q3 earnings reports. First, Palantir increased in the Q2 report its revenue guidance for the fiscal year 2024 to between $2.742 and $2.750 billion in August, which helped its stock rise above $30 per share for the first time since 2021. Then, in the Q3 report, the company once again increased its revenue guidance for the fiscal year 2024 to between $2.805 and $2.809 billion, which translates to a Y/Y growth rate of nearly 26%.
As the annual revenue outlook has been increased by around $60 million in the Q3 report in comparison to the outlook in the Q2 report, the market has positively reacted to it and helped Palantir to increase its market capitalization by over $50 billion in a few months. Right now, Palantir has a market capitalization of around $180 billion at the time of this writing.
Although Palantir's performance has been impressive in the last year, we don't believe that the performance justifies such an aggressive increase in capitalization. As of now, Palantir has a P/E of over 200x, while the sector has a P/E of only 26x. The current P/E of the S&P 500 Index is only 28x. Those multiples show that Palantir's stock is detached from reality.
The combination of all of those factors makes Palantir an extremely overvalued company. In our previous article, we created a valuation model with pretty optimistic assumptions to see how big Palantir's intrinsic value could be under one of the most bullish scenarios. That model showed that Palantir's intrinsic value is only $23.27 per share.
We decided to take a step further and change some of the assumptions in this article to truly figure out Palantir's full potential to make sure that even under the most extreme assumptions, the upside for its stock at the current market price is not there.
The assumptions table below underwent several changes in comparison to the previous model. One of the most important things that we did in comparison to the previous model is we changed the tax rate in our model from 21% to 15%. The 21% rate is the current standard corporate rate in the United States. However, the potential tax reform under the Trump administration could decrease the tax rate to only 15%. Since our model includes pretty bullish assumptions, we decided to use the 15% for now.
We also slightly changed the assumptions in the tables that calculate the discount rate. We updated the risk-free rate in our cost of equity calculation because of the rising treasury yields and changed the market cap, which increased since the release of our latest article.
The share price in the entry data table has also been updated. Everything else remained the same as in the last article.
Palantir's valuation model (Bears of Wall Street)
In the forecast table below, we assume a 30% sales growth rate in FY24. This is the same rate as in the previous model. It is also above the management's current expectations of ~26%, but there's a possibility that Palantir will exceed expectations in Q4, which would result in higher sales for the year. For all the other years in the forecast table, we assume a gradual improvement in sales. This is above the overall expectations of a less than 25% growth rate in the following years, but it will help us understand Palantir's intrinsic value under the most extreme assumptions.
The EBIT margin remained the same as in the last model, and the tax rate decreased to 15%. The bottom part of the forecast table is mostly unchanged from our recent model.
Under those assumptions, our model shows that Palantir's enterprise value is $61.2 billion. At the same time, its equity value is $65.78 billion, which translates to an intrinsic value of $26.74 per share. While our improved assumptions led to the higher intrinsic value, we can still see that Palantir is extremely overvalued, and its current stock price is detached from reality.
Palantir's valuation model (Bears of Wall Street)
Reason To Short Palantir #2: The Macro Risks Are Increasing
The potential worsening of the macroeconomic environment is another thing that can push Palantir's share price lower. In 2022, when inflation was rampant, the stock market was not performing well and Palantir's shares were traded mostly at single digits. At the beginning of 2023, the disinflationary process began, which helped revive the stock market growth and improve the economic forecasts. While the disinflationary process has been ongoing to this day, there's a risk that we could experience a return to the inflationary environment. Here's what the December Fed minutes stated:
With regard to the outlook for inflation, participants expected that inflation would continue to move toward 2 percent, although they noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated.
The potential policy changes likely mean the implementation of Trump's tariffs, which are expected to be imposed on February 1 on goods from various countries that trade with the United States. The tariffs over the long term might lead to the revival of inflation and once again prompt the Federal Reserve to enact a more hawkish policy that would likely diminish the growth outlook. This could negatively affect Palantir's outlook and lead to the depreciation of its stock.
Reason To Short Palantir #3: The Stock Is Losing Its Momentum
Relying solely on fundamentals is not the way to go in the current market environment. In our latest article on Palantir, we said that the company is already extremely overvalued, but decided not to open a short position at that time because the stock has been experiencing an upward trend.
However, recently, Palantir's stock began to lose its momentum, which was a signal for us to act. Right now, the stock is range-bound between $60 and $85 per share. It failed to break the resistance level around $85 per share and reach new highs a couple of times already, as the selling of shares has been intense around that level.
Palantir's stock price (Seeking Alpha)
If Palantir's stock once again fails to break the current resistance level in the foreseeable future, then we could expect a depreciation to its support level at around $60 per share, which already happened a couple of weeks ago. If the support level at around $60 per share is broken, then there's a possibility of a selloff to the next support level at around $40 per share. If that happens, we will be covering our position during the depreciation to realize a profit.
If Palantir's stock manages to overcome the resistance level that's around $85 per share, then the stock will reach another all-time high and will look for a new resistance level. We committed less than 5% of our portfolio to this short position, so we would have enough room to wait for the stock to find that new resistance level and figure out our next move. Our stop loss is above $100 per share.
Risks To Our Bearish Thesis
On February 3, Palantir will release its Q4 earnings report. There's a possibility that the company will exceed its annual outlook that was presented in the Q3 report and will also provide an outlook for 2025 that's much higher than the current street consensus. If that's the case, then we might see a further rise in share price, as it happened after the release of Q2 and Q3 reports last year.
The macro risks might also subside if the global economy manages to overcome the tariffs and trade war risks. The latest report by the OECD forecasts a global GDP growth rate of 3.3% in 2025.
As such, the potential better outlook along with a possible better macroeconomic environment could once again give a boost to Palantir's shares and undermine our bearish thesis.
Final Thoughts
In our opinion, the combination of weak fundamentals, rising macro risks, and a stock losing its momentum create a perfect opportunity to open a short position in Palantir. There's a risk to our short position if the fundamentals significantly improve or the macro challenges won't materialize and result in the appreciation of shares.
However, after weighing all the opportunities and risks, we believe that shorting Palantir makes sense at its current price, especially since the cost of borrowing its shares is less than 1%. The short position also represents less than 5% of our portfolio, which ensures that the risk of losing all of our capital is minimal in the worst-case scenario.
