The word of the analyst community can have a profound impact on stock prices. Just ask Palantir (NYSE:PLTR), who lost around 10% of its value in pre-market trading after a word from Morgan Stanley saw the stock's overall assessment go from “equal weight” to “underweight.” Such a move has clearly prompted investor concerns, but is this a sign to get out, or a sign to buy in?
The Poisoned Pen
Morgan Stanley's downgrade in rating came about as the result of essentially two factors: one, issues of the “risk / reward paradigm”, which suggests that those who buy in on Palantir may be buying in on an overpriced stock, and two, not much change in the “fundamental story” showing up after the company's spectacular initial public offering (IPO) saw the stock climb to about three times its IPO price in late November.
While that's only a large climb on a percentage basis—the IPO started around $10 per share and the 52-week high was $33.50—it's still a pretty pronounced climb for a comparatively new stock. What's more, the latest word out of Morgan Stanley says that there are a range of unanswered questions as yet as to how Palantir can continue to be worth so much more than its initial asking price. Such questions are likely to weigh on investors, especially if those investors happen to share those questions along with Morgan Stanley.
The Poisoned Office Supply Cabinet
As it turns out, based on our latest research, there's reason to be concerned about Palantir in the near term. Though Palantir is considered a “trending stock”, the trend isn't exactly running positive. A month ago, the stock averaged a “hold” consensus, with four “hold” ratings—Morgan Stanley was among those—and two “buy” ratings. Now, we have one “buy”, four “hold” and one outright “sell.”
However, a point in Palantir's favor is that the consensus price target has increased in the last month, though still well below where the company is currently trading. A month ago, the consensus was holding at $11.33, while now, it's up to $13.50. Considering the company is currently trading at $21.76 as of this writing, however, there's certainly something to be said for backing away from this company for a little while.
Post-IPO Euphoria and the Big Data Buying Spree
Considering that, just a month ago, there was already speculation that this company would wind up as “the next Facebook,” it's not surprising that there was some perhaps unsupported run-up in pricing.
This run-up isn't exactly out of line; after all, Palantir's bread and butter is big data analytics, a point which numerous firms have been dying to get into for years now. Looking at all the various possibilities big data brings along with it, it's no wonder that Scott Adams, in a “Dilbert” strip, once treated big data like a religion, complete with the Pointy-Haired Boss on his knees facing a bag of money and intoning “Let us pay.”.
A company that can handle big data offerings well can offer a range of products to a range of firms, especially now. Since big data represents a way for retail businesses to get even more efficient by pinning down things like traffic flow, popular products and other things that allow the company to best restock and staff, retailers have been especially interested. They're not alone; businesses of multiple stripes have wanted to put big data to use to improve their own operations, but the question was generally one of accessibility. Big data takes a lot of high-end engineering to make happen, something most firms don't have access to or interest in producing. If Palantir can quickly, readily find a way to make big data accessible to the small business, then the pricing you see today isn't overinflated at all. It represents the deal of the century.
The impact big data can have is enormous; Palantir itself has one great success story about an energy firm who put Palantir's enterprise resource planning (ERP) suite into play. It took two weeks for said energy firm to discover $57 million in cash savings, and the company is on track to use Palantir's systems to save $1 billion annually.
However, a widespread use case likely to take time. In the meantime, Palantir's share price is likely to slip still further, back closer to its IPO price, and the consensus price target we've already seen. Buying in on Palantir is still a good idea, but not right now. Let the weak hands step out of Palantir, and let the price slip back to a more manageable level. Then watch to see what kind of product line Palantir's looking to bring out, and let that guide your buying decisions.
