Why Did Palantir Shares Plummet in November?
In November, Palantir Technologies (NYSE: PLTR) experienced its worst monthly stock performance in over two years, falling by 16%. This drop, driven by valuation concerns, reflects a broader pullback in the artificial intelligence (AI) sector as investors worry about inflated valuations and a potential market bubble.
Initially, November started off on a positive note for the data analytics company following strong third-quarter earnings. Palantir exceeded Wall Street expectations for both revenue and earnings, reporting over $1 billion in revenue for the second consecutive quarter. However, this momentum quickly evaporated as analysts raised questions about the company’s high valuation metrics.
Valuation Red Flags Highlighted by Experts
Several Wall Street firms expressed skepticism about Palantir’s stock valuation. Jefferies labeled it “extreme,” advising clients to consider alternatives such as Microsoft (MSFT) and Snowflake (SNOW). Deutsche Bank also voiced concerns, calling Palantir’s valuation levels “difficult to wrap our heads around,” while RBC Capital Markets cited issues with its “increasingly concentrated growth profile.”
Even after the decline, Palantir’s valuation remained staggering, trading at 233 times forward earnings. In comparison, Nvidia (NVDA) trades at 38 times forward earnings, and Alphabet (GOOGL) sits at around 30 times. This has further fueled debates on whether the AI sector is overhyped.
Michael Burry Enters the Picture
The selloff worsened after renowned investor Michael Burry disclosed a short position against Palantir. Burry, famous for predicting the 2008 housing crisis, also revealed short positions against other AI-driven companies, such as Nvidia.
Palantir CEO Alex Karp responded vehemently, accusing Burry of engaging in “market manipulation.” In interviews with CNBC, Karp defended the company’s valuation and remarked, “The idea that chips and ontology is what you want to short is bat— crazy.” He reiterated that Palantir offers growth opportunities previously exclusive to top venture capitalists in Silicon Valley.
Broader AI Market Weakness and Its Impact
The selloff in Palantir stock was mirrored across the AI sector. Nvidia saw a 12% decline in November, while Microsoft and Amazon each fell by around 5%. Quantum computing stocks faced even sharper declines, with Rigetti Computing and D-Wave Quantum losing more than a third of their value. Notably, only Apple and Alphabet from the so-called “Magnificent 7” tech stocks reported gains during November.
Deals Struck, But Concerns Linger
Despite its valuation troubles, Palantir announced several significant agreements in November, including a multiyear AI adoption contract with PwC in the U.K. and a partnership with aviation maintenance firm FTAI. While these developments are notable, they have failed to calm investor unease over the company’s high valuation.
Wall Street Ratings: A Divided Outlook
Analyst opinions on Palantir remain mixed. Out of 16 analysts surveyed, three rate the stock as a “Buy,” 11 as a “Hold,” and two recommend selling the stock. The average price target stands at $187.87, suggesting an 11% upside potential. However, the broader uncertainty in the AI sector continues to weigh heavily on investor sentiment.
Bottom Line
Palantir’s struggles encapsulate the broader challenges facing the AI sector. The company has an impressive product portfolio and has successfully established itself in the data analytics space. Still, concerns over its valuation and the sustainability of AI-driven growth weigh on its stock.
If you’re seeking to benefit from AI growth, consider exploring diversified AI indexes or ETFs instead of focusing on single stocks. For instance, the iShares Global Tech ETF (IXN) offers broad exposure to the tech and AI sectors, reducing risk while capturing growth opportunities.
