After surging three-fold following the November U.S. elections, investors are starting to take profit with Palantir TechnologiesÂ (NYSE:PLTR). Hitting prices topping $33 per share, Palantir stock has since slipped to around $25.60 per share. But while itâ€™s starting to pull back, shares in this big-data play have more room to fall from here.
First, thereâ€™s the potential for retail investor speculation (which drove the rally) cooling down. Investors bet big the upcoming Biden administration will be a gold mine of opportunity for Palantirâ€™s federal business. But now after the recent gains, many are starting to cash out.
Second, as I said on Dec. 21, the recent run-up could mean a mad dash of insider selling when the stockâ€™s insider lock-up expires.
Third, while its prospects look bright, the juryâ€™s still out whether Palantir can scale up as quickly as similar, but different, SaaS names.
Admittedly, shares arenâ€™t guaranteed to head lower from here. Given how positively investors reacted previously to what could be considered small potatoes news, it may not take much to send shares well above $30 per share in the near term.
In short, while thereâ€™s clearly strong growth ahead for the underlying company, itâ€™s been more than factored into its stock price. As the risk of shares heading lower exceeds the odds it rallies yet again, itâ€™s still too early to buy the dip.
Palantir Stock: Growing Fast, But Overvalued
While I remain bearish on Palantir stock, I concede bulls on the stock are barking up the right tree. With revenues expected to climb 32% in the next year, and similar levels of growth projected in the coming years, I agree thereâ€™s a legitimate growth story here. The problem? Investors have overplayed their hand by bidding this up too far, too fast.
This was the key rationale behind Credit Suisse analyst Brad Zelnickâ€™s recent â€œsellâ€ rating on the stock. Setting a $13 per share price target, Zelnick sees â€œvaluation disconnected from fundamentals.â€ With Palantir trading far above what he calls its â€œblue-sky scenario,â€ downside at todayâ€™s prices is massive.
Other reasons behind his downgrade? Potential challenges in signing new big-ticket deals, for one. Also, thereâ€™s the companyâ€™s upcoming insider lockup expiration (more on that later). But by and- large, the bear case for Palantir is one about valuation.
Sure, in 2020â€™s â€œgrowth at any priceâ€ market, valuation wasnâ€™t much of a concern. Yet while that strategy worked quite well from March until now, that may not be the case in 2021. Especially for Palantir, which could quickly head below $20 per share in the coming months due to multiple factors.
Fast Headed Below $20
Right now, there may be enough retail investor enthusiasm to keep Palantir stock steady at todayâ€™s prices. But as I discussed, there are several factors that could push it below $20 per share in the coming months.
Namely, consider its popularity among the Robinhood trading community cools down after its incredible run. Unlike with hot sectors like electric vehicles, there isnâ€™t a megatrend in motion for Palantir to give its recent rally additional runway. Sure, the upcoming Biden administration could bring a ramp-up in national security and defense spending on big data. But likely not to a degree dramatically above prior price estimates.
If Palantir fails to â€œcrush itâ€ come earnings time in the coming quarters, expect many of the stockâ€™s recent buyers to head for the exits.
The other major downside risk? The upcoming lockup expiration. Palantirâ€™s insider lockup expires once it releases full year results for 2020. Based on third-quarter earnings coming out on Nov. 12, I would assume Q4 results will hit the Street sometime in February.
A long-term issue with Palantir remains whether it can scale up like a commercial-focused SaaS company. Only time will tell whether the company will get to $6 billion in annual sales by 2028, or if its growth train will run out of steam long before then.
Donâ€™t Try to Catch a Falling Knife
Itâ€™s still risky to go against the grain when it comes to Palantir. But, as I discussed, thereâ€™s plenty that could push shares lower in 2021. Whether thatâ€™s near-term issues, like a reversal in the Robinhood rally, or the upcoming lock-up expiration, Long-term concerns remain top of mind. Its ability to continue scaling up through the 2020s is questionable.
Put it all together and thereâ€™s more to drive Palantir stock higher rather than lower in the next 12 months. At lower price levels, risk/return may return in your favor. But right now, itâ€™s still early to enter a position.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.