What happened
Shares of software-company Palantir Technologies (PLTR +0.52%) has been a darling among retail investors since its publicly traded debut in late 2020, but the company has plenty of skeptics on Wall Street. Critics are getting their way for the time being.
Palantir stock was down 6.7% today as of market close, caught up in yet another steep slide for high-growth but richly valued stocks. Palantir is now nearly 60% below its all-time high, reached in early 2021.
Image source: Getty Images.
So what
The catalyst for this most recent dip has less to do with omicron-variant concerns and more to do with a rise in interest rates. Minutes from the Federal Reserve's last meeting showed the central bank is mulling raising interest rates sooner than later to try and tame inflation. This sent the yield on the 10-year Treasury to 1.7% -- closing in on the 1.9% level it reached just before the pandemic started.
As a reminder, higher interest rates lower the value of a company's future cash flows, which, in turn, lower the present value of the stock.
Now what
This doesn't mean Palantir, the business, is doomed. On the contrary, as a leader in next-gen software analytics for large enterprises, Palantir has a rosy future. But growing pains are hard, and the market's appetite has been spoiled for richly valued stocks such as this one. (Shares currently trade for just under 21 times expected current-year revenue-to-enterprise value.)
Nevertheless, if Palantir can continue expanding, especially in its commercial business outside of government contracts, the narrative will eventually change, and the stock will resume rising again. Plus, it's often overlooked that, though Palantir is spending heavily on development and marketing, it's actually profitable on a free cash flow basis. That also bodes well for this company's eventual long-term payoff.
