Sell Palantir Stock Into Strength, Despite All the Promising News

After their recent sell-off, AI stocks are attempting to make a recovery. However, in the case of Palantir Technologies (NYSE:PLTR), said recovery has seemingly already started. Last week, a pair of positive developments helped to send Palantir stock from the low-$20s, back on up to prices above $30 per share.

Yet while investors in this AI software company have plenty to celebrate right now, don’t assume that means now is the time to jump in, ahead of a surge to even higher prices. Nor is the latest news and price action a sign for existing investors to “let it ride.”

Palantir may have a lot going for it, both now and in the long-term, but near-term price performance could soon once again turn on a dime. It all has to do with the stock’s “priced for perfection” status.

Yes, there are substantive reasons behind arguments stating that PLTR isn’t overvalued at 83.6 times forward earnings. However, this rich multiple does leave shares vulnerable, when, not if, the next round of fear and uncertainty about AI stocks takes shape.

Palantir Stock Rally: PLTR Surges on Strong Earnings and Partnership News

Post-market on Aug. 5, Palantir released its results for the June quarter. Immediately following the earnings release, shares experienced a double-digit rally. It’s easy to see why.

As Louis Navellier and the InvestorPlace Research Staff pointed out in a post-earnings write-up on PLTR, it wasn’t just the results themselves that knocked it out of the park.

Along with reporting 27% year-over-year sales growth, and 500% YoY earnings growth, Palantir also “crushed it” on other key performance indicators.

Commercial customer count continued to outpace commercial sales growth, and once again, Palantir’s revenue growth from government end-users also re-accelerated.

Not too long after the earnings release, Palantir stock bolted higher again. This time, due to the announced formation of a strategic partnership with Microsoft (NASDAQ:MSFT).

Palantir will begin to offer its Artificial Intelligence Platform software products on Microsoft’s Azure Government and Azure Government Secret cloud computing platforms.

It’s clear why investors reacted just as positively to this news as they did the earnings news. This represents yet another sign that Palantir’s government business, not just its commercial business, will stay in high-growth mode.

Yet while there’s much to celebrate, don’t assume the party carries on indefinitely.

Why Correction Risk Remains

A rich valuation should never be the sole reason to go bearish on a stock. This applies to the situation at hand with Palantir stock. Again, if high growth persists, or further potentially game-changing announcements are made, PLTR could easily maintain a forward price-to-earnings (P/E) ratio leaps and bounds beyond that of most of its peers.

However, sooner than you think, the market may have reason to reconsider its “buy at any price” mentality about Palantir.

Although the overall AI stock sell-off has eased, concerns about a slowdown in AI spending due to macroeconomic challenges has not completely gone away.

If such concerns re-heighten, this alone could drive a reversal for PLTR. Even if concerns about this dissipate, Palantir shares could still tumble, for more company-specific reasons.

As William Blair analyst Louie DiPalma pointed out in his downbeat post-earnings research note on this stock, while the company reported strong results, Palantir only raised its Q3 2024 guidance by 2%.

While not certain, this could be a sign that less stellar results are just around the corner. If PLTR cannot knock it out of the park again when it next reports earnings, the market reaction could be decidedly negative.

Bottom Line: Sell and Wait for Re-Entry

Don’t get me wrong. While I’m not a fan of Palantir at its current valuation, I agree there is much to be bullish about when it comes to this stock and its long-term potential.

In the years ahead, as both businesses and governmental agencies continue to increase their usage of artificial intelligence software, this company is poised to continue growing at an above-average pace.

Yet while the PLTR growth story may have a strong chance of continuing to play out in the long-run, in the short-run shares could once again encounter heavy turbulence.

In the months ahead, there’s still a decent chance shares dip back to the low-$20s, or even lower.

With this in mind, here’s the takeaway. If you bought into Palantir stock at lower prices, now’s the time to take some chips off the table. Irrespective of whether you own it now, or have been sitting on the sidelines, it may be best to wait for reentry or your initial entry, until the next time shares dip back to relatively more reasonable prices.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.