Why Palantir reversed course on Friday

What happened

Palantir Technologies (NYSE: PLTR) stocks have been on a wild ride of late, up 50% for the week and 170% for the month. The software and data technology company got off to a hot start Friday morning, gaining as much as 15%, but then plunged after a major short seller issued a warning about the stock.

So what

Palantir, a software and data company co-founded by Peter Thiel, went public in late September and really started to grow at the end of October. Shares have now risen more than 200% since its inception, with investors optimistic that Palantir’s sophisticated data analysis tools will continue to gain traction with government and commercial clients.

This kind of meteoric rise tends to attract the attention of short sellers; and of course, Citron Research tweeted a message on Friday calling the stocks “no longer a stock but a full casino” and saying it “doesn’t take a crystal ball to know it will come back to Arda”. (Arda is the name of the Earth in the the Lord of the Rings, the novel which is also the source of Palantir’s name.)

What a race last month for everyone. But as traders looking for short exposure, $ PLTR no longer a stock but a complete casino. It doesn’t take a crystal ball to know this will come back to Arda. Shorting with a goal of 20 $ 2020

– Lemon Research (@CitronResearch) November 27, 2020

Palantir shares responded by reversing a strong open and trading up to 10% for the day before recovering somewhat to close at 4.8%. Citron said it was entering a short sale with a target price of $ 20 per share, well below the closing price of $ 27.66 per share on Friday.

Now what

Investors shouldn’t have needed a short seller to tell them that Palantir stock was ahead of the Palantir company. The recent surge in stocks has allowed the market to value Palantir at over $ 50 billion, which is 50 times the company’s expected revenue in 2020.

Since Palantir depends on the government for a significant portion of its sales and other publicly traded government service companies trade at multiples of less than three times sales, Palantir’s run will lead to some skepticism.

Bulls can claim that Palantir’s superior technology will help them attract business customers over time and should allow for a higher multiple. It could be correct. But Palantir is also the target of criticism for his government work, which could limit interest in the action.

There is definite value in this company, and I note that even at Citron’s target exit price, the stock would still carry a high multiple. But for all of Palantir’s fabulous tech, the company has yet to figure out how to defy the laws of gravity, and given the recent surge, some sort of pullback should come as no surprise.