When I planned this Palantir (NYSE:PLTR) write up last week, I wanted it to be a clear buy recommendation. The bad news is that PLTR stock took off like a rocket into space. That’s good news for those long it already. But for new buyers, it’s not a good idea to chase a stock after 20% rally in mere days. This is especially true when the company has just gone public.
Therein lie a few mysteries that Wall Street needs to unlock first before trading it with conviction.
First and foremost, I am a proponent of owning PLTR stock for the long term. The segment is exciting and seems like it will have years of prosperity in front of it. For decades, the world has been striving to be completely data driven. Palantir is in the business of data-gathering and analysis. You can’t go wrong in that. Those who own the data control the world, so there is a race to use services like this. The business from the government alone serves as a great base from which they can execute on their plans.
Timing PLTR Stock Is Tough
The timing of adding the PLTR stock is the tricky part. It has been moving way too fast for us to get a clear entry point.
Last week when it was near $9.40, it was worth a shot to start a position. If the intent is to own it for many years, then this is just fine. But for those more active traders among us, below are a few thoughts.
I prefer starting off a trade on a good note.
I don’t aim at perfection but I strive to avoid obvious traps. This rally in PLTR stock brings the price into its biggest fail point to date. Those are usually tough resistance levels, at least on the first try. The bulls will probably want to fade at least one more time to build better momentum. This is how bullish technical patterns develop, like the cup and handle. This could be one here, but if I don’t have a trigger I don’t have a trade. I prefer to wait for confirmation of the breakout before I chase it.
Fundamentals Matter and They Are Encouraging
Fundamentally, it is still too young to judge it well. On the surface, there are no flagrant fouls. Its price-to-sales is reasonable at 16.6. This sounds high, but they delivered 25% growth last year. I can give them the benefit of the doubt that they will continue like this for a while. For absolute comparisons, it’s three times more expensive than Amazon (NASDAQ:AMZN) but more than three times and six times cheaper than Shopify (NYSE:SHOP) and Zoom (NASDAQ:ZM) respectively.
Now that we’ve established its fundamental viability, we can address Wall Street’s opinion of PLTR stock. We want to see if they have lofty expectations. Those raise the likelihood of temper tantrums around the earnings reports.
In this case, there are no obvious egregious rankings there. The few who track it are heavy hitters and they have reasonable expectations. Goldman Sachs, Credit Suisse, and RBC Capital have it as neutral or buyY. Only Morgan Stanley has it as an “overweight.” None of them has a massive price target, so my guess is that there is no obvious headline risk there.
For new issues there usually is another potential source of headline risk. IPOs usually have a lockup period when insiders cannot sell their shares. But when those green light dates come the selling is sudden and drops the price.
In this case it’s different. PLTR inside owners had the opportunity to sell 20% of their shares before the lockup dates. Even though they had technical issues doing it, I bet the remainder of the insiders are tough cookies. They are not likely to be weak hands later.
The Net Net
Now we can circle back and restate the conclusions today. PLTR stock is one to own for a long time. If markets are higher in the future, it will be too. For trading purposes, investors can chase the breakout into a new high. The rally from there will be in thin air, so it will have legs. In fact, I bet that rising above $11.10 could be the trigger it needs. Conversely, if we are lucky enough it would correct a little soon.
A dip to $10.20 or lower would make for a great entry. Investors can lock that price now by selling the Feb PLTR $9 put and collect $1.20 for it. If it falls below $9 then they own the shares at that price. Break-even is $7.20 per share. Otherwise, the profits would come without any out-of-pocket expense.
Today we discussed two different styles of investing versus trading, and they are not mutually exclusive. PLTR could be brewing a swing trade or a long term commitment soon. The prevailing meme is that it’s wrong to turn a trade into an investment. In this case, I don’t mind it at all.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.