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Wait for a Pullback in Palantir Stock

It’s safe to say investors aren’t too enthusiastic about Palantir (NYSE:PLTR) stock, which recently went public. Shares in the big data company have disappointed in the weeks since its Sep 30 direct listing. Sure, there was a slight pop from its $7.25 per share reference price. But, compared to recent tech IPOs, this is far from being a “hot stock.”

What’s behind this? Sure, shares look richly priced right now, and profitability remains a work in progress. But that’s also the case with many of the other growth stocks that have soared after going public this year.

A big factor is Palantir’s business model. Yes, much of its business is commercial. But, the company’s work with U.S. Federal Agencies remains its bread-and-butter.

The controversy related to this is what’s driving the tepid response to the direct listing. As the backlash accelerates, continued growth may be in question.

Coupled with a grab bag of other concerns, it’s clear why it may not be wise to go contrarian and buy now. Even after the stock’s lukewarm response from Wall Street. There’s plenty on the horizon that could sink shares lower in the coming months.

So, what does that mean? There may be opportunity here, but take your time. A pullback further into the single digits may give you a better entry point.

Is PLTR Stock Reasonably Priced? It Depends

At first glance it seems Palantir is reasonably-priced for a recently-public tech company. Sure, with shares trading at a forward price/sales (P/S) ratio of 14.4, this is no value stock.

But, as this commentator noted, compared to other tech names that have recently gone public, like Snowflake (NYSE:SNOW) and JFrog (NASDAQ:FROG), its forward multiple looks downright reasonable.

Yet, is this truly an apples-to-apples comparison? Palantir’s customer base a whole lot different that than of either of these “too hot to touch” tech plays.

The company has build a substantial book of business in the private sector. But, its work with intelligence and law enforcement agencies is what’s top of mind. And, due to its contracts with the U.S. Immigration and Customs Enforcement (ICE), the backlash is only going to get worse.

With major media headlines calling it the “controversial data company,” Palantir is no longer behind the scenes. But, while this is a risk, it’s not the company’s largest issue with investors.

Its the concern whether this company, which has never turned a profit, can finally scale into profitability. With its sales reaching the billion dollar mark, one would expect positive cash flow is on the horizon. But, that likely won’t happen until it further expands its private-sector business. As InvestorPlace’s Mark Hake wrote Oct 16, scrutiny from government watchdogs may limit how much it can turn its public-sector work into a cash cow.

That’s the long-term risk with PLTR stock. But, what about the near-term? While one potential headwind may wind up a “nothing burger,” another may drive shares lower in the coming months.

Lock-Up Expiration A Larger Concern Than Upcoming Election

Palantir’s estimated earnings date is sometime in December. Positive results and guidance could finally warm Wall Street up to this company. Conversely, shares could take a big tumble if it falls short of expectations.

But, that’s not the only near-term risk for those diving into PLTR stock today. One that’s on people’s minds is the upcoming U.S. Presidential Election. Given co-founder Peter Thiel’s ties to President Trump, investors may sell on the news of a Biden victory. Yet, a sell-off may be short-lived. The company has thrived during both Democratic and Republican administrations.

So, the upcoming election may not really change things for Palantir. But, what about the lock-up expiration a few months out? Once that happens, insiders will be free to unload more of their shares on the open market. As our own Ian Bezek discussed Oct 19, insiders were selling shares in the private market before the direct listing. Not only that, but at prices far below where shares trade today.

In short, the election won’t make or break the company’s prospects, but the specter of insider selling should definitely be a concern.

Take Your Time With Palantir

There’s good reason why investors weren’t chomping at the bit to buy after the direct listing. The controversy surrounding its public-sector business, coupled with valuation and profitability concerns, make this opportunity anything but a slam-dunk.

If the company can crush estimates, and post strong results in December, Palantir has a shot at heading higher. Yet, the insider selling prior to the direct listing does investors a whole lot of confidence.

So, what’s the call? Take your time with PLTR stock. If more bad news hits the street, shares may fall to a more favorable entry point.

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