Palantir's epic run-up gives the market a reason to sell

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At valuations so high, solid quarters aren't enough. In fact, even stellar results won't cut it. Just ask Palantir (PLTR).

The tech giants have been at the mercy of sky-high expectations for years, amplified by the AI bonanza and swelling valuations that demand immaculate earnings to keep afloat. Palantir, which rose the most of any S&P 500 company last year and has extended an epic run, faces even more pressure. After posting record-setting results with US revenue that rose 80%, shares fell 7%. Sign up for the Yahoo Finance Morning Brief By subscribing, you are agreeing to Yahoo's Terms and Privacy Policy

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As CEO Alex Karp put it, "These are arguably the best results that any software company has ever delivered." The stock market had other ideas.

Despite putting up impressive figures and beating estimates, analysts couldn't agree on a single line-item explanation for the investor retreat. But that in itself can be revealing. At a stock price so high, there doesn't need to be a new reason for people to exhibit caution. Maybe they just want the money.

And given Palantir's meme-adjacent status, the slightest shifts in sentiment can make all the difference.

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That's evident too in how Karp and Palantir's boosters have pushed back against the perception that the company is overvalued.

After boasting about Palantir's exemplary performance, Karp said, "And that's not hyperbolic, despite what your analyst friends may want you to believe because they've been wrong at every price, they're wrong at every single round."

One the one hand, sure. On the other, you could also let the ball do the talking.

Dan Ives, an analyst at Wedbush who has described Palantir as the "Messi of AI," said in a note to clients Tuesday that any weakness could be tied to investors thinking "this is as good as it gets."

But they would be wrong, in his judgment: "We would be buying this stock all day long given our view this will be one of the AI tech stalwarts over the next decade."Palantir co-founder and CEO Alex Karp attends meetings at the US Capitol in Washington, D.C., on Oct. 18, 2023. (Reuters/Jonathan Ernst)·REUTERS / Reuters

Hubris comes to mind. Or maybe defensiveness. But to be fair to Palantir loyalists, what other way could you come across if your multiples are well above the industry norm and your outlook is essentially "more, more, more."

Palantir shares are up more than 170% for the year and trade at a forward 12-month price-to-earnings ratio of 230, far above the P/E ratio of 35 for the "Magnificent Seven" stocks, according to Bloomberg data.

Story Continues

To observers less sympathetic to Palantir's lofty ambitions, not even a blockbuster quarter justifies the outsized valuation.

That sentiment also applies to the broader criticism of the AI rally. The pullback after Palantir's earnings comes as investor Michael Burry — of "The Big Short" fame — disclosed on Monday that his hedge fund has taken positions against Nvidia (NVDA) and Palantir. If Burry was right about the US housing bubble and stock market crash, is he also onto something about AI?

The issue doesn't have to be so black-and-white, of course.

At a financial summit in Hong Kong on Tuesday, executives at Goldman Sachs and Morgan Stanley warned that investors should brace for a drawdown of 10% or more over the next year or two and that such a pullback may be a healthy part of the market cycle.

All the talk of an AI-fueled bubble also implies that equities still have room to run.StockStory aims to help individual investors beat the market.

Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on X @hshaban.

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