Why Is Palantir Technologies Stock Crashing This Week?
Key Points
Despite beating Wall Street targets in its latest earnings, investors are growing increasingly wary of its astronomical valuation.
Michael Burry, famous for anticipating the housing crisis of 2008, has bet against Palantir with a significant number of put contracts.
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Shares of Palantir (NASDAQ: PLTR) are falling this week, down 15.1% as of 11:44 a.m ET on Friday. The move comes as the S&P 500 (SNPINDEX: ^GSPC) and the Nasdaq-100 lost 2.8% and 4.6%, respectively.
The artificial intelligence (AI) powerhouse released another earnings beat on Monday, but the numbers still failed to impress investors, given its extreme valuation. On the same day, a regulatory filing revealed that Michael Burry, head of Scion Asset Management, has taken a significant position, betting Palantir stock will decline.
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Burry believes Palantir stock will fall
Michael Burry, the contrarian hedge fund manager made famous by the 2015 film The Big Short, revealed in a regulatory filing that his fund purchased 50,000 put contracts on Palantir stock -- options that pay out when a stock declines in value.
The revelation timed up with a broader sell-off of AI-related stocks as investors become increasingly wary of stretched valuations. With a price-to-earnings ratio (P/E) of more than 600, Palantir is one of the most extreme examples of this, and the company's earnings release, while showing rapid growth continues, was still underwhelming for many investors, given the stock price.
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Palantir's stock is overpriced
While investors can get carried away waiting for the perfect deal and miss opportunities, the reality is that a strong company can be a bad investment. It's hard to look at Palantir's current valuation and see it as anything but extreme.
With a P/E of more than 600, Palantir would have to grow its earnings tenfold just to approach somewhat reasonable levels and even then, it would trade with a P/E nearly twice that of Alphabet. I would avoid Palantir stock.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Palantir Technologies. The Motley Fool has a disclosure policy.
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