Palantir Technologies Inc. (NYSE: PLTR) is taking a breather after climbing to over $43 a share in early October. The stock had dropped 3.7% from peak to trough and climbed above $43 but has failed to push past what appears to be forming a level of resistance.
One reason for the choppy price action may be found in the short interest which has climbed over 45% in the last 30 days. Short interest is the total number of shares in a stock that have been sold short and remain outstanding (i.e., they haven’t been covered or closed out).
That's not surprising. The simplest way to understand an increase in short interest is that investor sentiment for a stock is turning more bearish. In the case of PLTR stock, that’s not surprising. Palantir has been a target of short sellers because, by any objective measure, the stock is overvalued, even among technology stocks.
And when you combine a high valuation with significant trading volume, conditions are ideal for the stock to move lower. But does this mean short sellers are right?
Is Palantir Really Any Different From the Rest?
That’s the question for many investors who have remained on the sideline while Palantir has climbed from a price below $8 to its current price of around $43. At issue is the company’s place in the software-as-a-service (SaaS) sector. If you view Palantir as just another player in this realm, it’s easy to see why investors could be skeptical.
However, what sets Palantir apart from its competitors is its comprehensive artificial intelligence (AI) platform – AIP. This lets customers use Palantir’s AI and machine learning tools with the large language model (LLM) of their choosing within Palantir’s Foundry or Gotham platform.
In the company’s own words, Gotham (for its government clients) and Foundry (for its commercial clients) offer the “ability to construct a model of the real world from countless data points.” AIP, then, is the way for the companies to link those data points in a way that drives meaningful returns for the business. This will be key as AI moves into the next phase.
Plus, Palantir’s go-to-market strategy focuses on its “Bootcamps,” which allow prospective customers to test drive Palantir software. The results are encouraging, as the company is increasing its customer base on both the commercial and government sides. The list of new customers is growing every day.
The Next Most Important Earnings Report Is Coming
With a stock like Palantir, earnings season takes on particular significance. Palantir has managed to beat expectations, but the comparisons continue to get tougher. That means the bar continues to get higher for a company that has a history of beating expectations.
So, what are analysts saying? Some analysts believe Palantir won’t be able to generate the revenue growth to support a forward price-to-earnings (P/E) ratio of over 224x. That may be true if you’re in the camp of analysts who believe the company must increase revenue at a compound annual growth rate (CAGR) of 35% over the next eight years.
However, other analysts believe the company can justify its lofty premium if year-over-year (YoY) revenue increases by around 20%. If you’re in that camp, you may not want to be shorting PLTR stock.
Here’s why. For its fiscal year 2023, Palantir grew its revenue by 16.7% YoY. However, through the first two quarters of this year, revenue is up 23.9% YoY. You can see why opinions are so mixed on Palantir.
Don’t Expect Meaningful Movement in PLTR Stock
PLTR stock closed the trading session on October 17 below $42 per share. However, the stock has since closed most of that gap. To be fair, the total short interest in Palantir stock is only around 4.8% of the entire float. That’s hardly concerning. However, the 45% increase in the last month means there will be selling pressure on the stock that is likely to keep a lid on higher growth.
A bullish earnings report can change that, but until then, PLTR shareholders should expect choppy price action. And as I mentioned in a prior article, if you’re uncomfortable with short selling, you could buy put options on PLTR stock with a longer-dated expiration date.
