PLTR alert: Sell Palantir shares now (buy back later)

Palantir Technologies (NYSE:PLTR) is a true AI growth story, and Palantir stock is an AI play with substance, not just one built on hype. As its recent results show, the enterprise software company is firing on all cylinders, benefiting from the increasing adoption of generative artificial intelligence.

For now, that strong growth story is more than enough to outweigh any valuation concerns. But don’t count on it to stay that way indefinitely. Why? Just look at how PLTR has traded in the past.

Since its IPO in 2020, shares have been subject to severe volatility. Sudden changes in market perceptions about the company’s long-term growth potential have led to temporary bouts of weakness. The next one could arrive sooner than you think.

Palantir shares: stable after earnings release

PLTR hasn’t exactly been on a tear since the company’s last earnings report just over a month ago, but shares have held steady at high levels during that time. Recent results and guidance updates have brought several positive takeaways.

Not only did Palantir report strong commercial growth in the March quarter, but recent results also suggested that the company’s government sales growth is steadily regaining momentum. This, in turn, could enable the company to achieve better-than-expected growth.

Related to this are further developments that have become known since the results were published. Namely, the news of a $480 million contract with the US Department of Defense. This news reinforces the argument that not only the commercial segment but also the government segment benefits from Palantir’s introduction of its artificial intelligence platform..

While these and other positive factors keep Palantir stock price between $20 and $25 per share, one should not expect this price range to continue until the next wave of truly groundbreaking news. A return to prices well below $20 per share is more likely than a sudden spike above $30 per share.

What could lead to a downgrade

Palantir is targeting revenue growth of over 20% this year. Further acceleration could push that annual growth to 25% or perhaps even 30%. However, don’t count on that translating into disproportionate profit growth any time soon.

At least based on sell-side earnings forecasts for 2025 and beyond. Although GAAP earnings are expected to more than triple this year, earnings growth in the coming years will closely correspond with expected revenue growth.

This raises the question of whether Palantir stock can continue to trade at 70 times expected earnings.

A multiple in the range of 30-40 might be more appropriate. Nevertheless, this is bad news in terms of potential valuation-related downside risks. A downgrade to 40 times forward earnings would mean a price decline of over 50%.

While such a downgrade is unlikely given the current sentiment, if Palantir fails to significantly exceed expectations in the coming quarters, this could lead to a turnaround.

Although it is not certain, this may be the reason why insiders were net sellers of PLTR, as I’m looking for Alpha Commentator Hunting Alpha recently pointed this out.

Throughout May, Palantir insiders, including co-founder Peter Thiel, engaged in aggressive insider selling. Thiel alone sold nearly $275 million worth of PLTR shares last month.

Your best move with Palantir at today’s prices

Don’t get me wrong. Given its strong track record and close relationships with government and commercial end users, betting against Palantir seems like a losing proposition in the long run.

Among enterprise software companies, Palantir appears to be best positioned to benefit from the Gen AI growth trend. However, that doesn’t make PLTR a buy at any price. Based on the forecasts, it’s clear that earnings growth will go hand in hand with revenue growth. Over time, PLTR’s valuation will normalize.

Therefore, it is preferable to wait for a significantly cheaper entry point. If insiders are taking profits, you should do the same if you own Palantir shares. Wait for the shares to correct to a more reasonable value before reopening a position, or open a position if you have not yet bought.

At the time of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com Publishing guidelines.