Is Palantir Overvalued? Here’s a Revealing Contrarian Take.

By Josh Enomoto

Although easily representing one of 2024’s elite tech enterprises, Palantir Technologies (NASDAQ:PLTR) admittedly carries significant skepticism when it comes to the viability of its forward trajectory. Since the beginning of January, PLTR stock has returned almost 340%. That’s a ridiculous stat, suggesting that the big-data analytics specialist could be due for a healthy pullback.

Sentiment among Wall Street analysts is mixed, as I explained in my Benzinga article earlier this week on a Palantir options play. With a sky-high earnings-to-sales multiple, the hesitation isn’t a surprise. Indeed, it would be more of a shocker if the rich valuation of PLTR stock didn’t bother the mainstream experts.

Still, in my presentation, it’s important to look at the empirical data. 

In short, PLTR stock features an upward bias when measured against weekly performance; specifically, the percentage difference between Monday’s opening price and Friday’s close. On any given Monday, investors buying PLTR are likely to see a positive return at the end of the week a whopping 54.3% of the time.

Now, the beauty of multi-leg options strategies is that the trader can define the parameters of success as they see fit. Suddenly, it’s possible to “artificially” stack the odds in the speculator’s favor.

Compelling Architecture of the Bull Call Spread

Obviously, those who are decisively bullish on PLTR stock can buy far out-the-money call options and hope for the best. However, a more reliable way of extracting quick profits comes in the form of the bull call spread. Here, you buy a call and simultaneously sell a call at a higher strike price (on the same expiration date).

Structurally, the bull call spread allows you to take the gross credit received from the short call sale to offset the debit paid of the long call. This net debit paid is the maximum you can lose in the trade (since options tend to be all-or-nothing affairs). However, if the target security reaches or exceeds the short strike price, you will collect the maximum reward.

When it comes to selecting your bull call spread, you must balance probabilistic risk with any potential opportunity cost. If you’re too conservative with your spread, any implied gain above the short strike is wasted since the maximum reward is capped. However, if your call spread is too aggressive, you risk losing the entire net debit paid.

With PLTR stock, because the concern exists that shares are overvalued, it may make sense to buy a more conservative spread where the breakeven point sits lower than the current market price. In that Benzinga article, I noted a transaction (at time of writing) that featured around a 65% success ratio.

That might sound fantastical until you realize that with a breakeven point below market value, a negative weekly return can still be a win in the context of the specific call spread strategy. So, there’s still an opportunity to be had in PLTR stock.

Addressing Overvaluation Concern

For those not interested in short-term options strategies but are instead focused on the long term, PLTR stock may seem quite risky. However, even in this framework, the empirical data seems to suggest otherwise.

In a weekly logarithmic price chart of Palantir stock going back to June of this year, the equity has been marching higher at an impressively ascendent angle. Truly, the consistency is something else. And because we’re talking about a logarithmic scale, the consistent rise in PLTR translates to exponential growth, not just mere “arithmetic” growth.

Given this dynamic, I’m hesitant to say that PLTR stock is due for an imminent pullback. Instead, I would be more willing to believe in a corrective phase if Palantir fails to hold support at $72.51 by the end of December. A danger zone may be if PLTR falls materially below the $66 level by the second half of January.

Until the exponential growth curve breaks down, it may be premature to hit the panic button.

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Josh Enomoto is currently rated #198 out of 30,278 financial bloggers on TipRanks with an average 20% return on his recommendations. Covering the hottest topics on Wall Street from initial public offerings to cryptocurrencies, you can also find Josh's work on InvestorPlace, Benzinga, and Emerging Growth. He has appeared as a frequent guest expert on CGTN America as well.