Artificial intelligence software powerhouse Palantir Technologies (PLTR +2.53%) remains one of the market's most polarizing stocks. Although the analyst community's consensus 12-month price target of $191.29 stands nearly 50% above the ticker's present price, Michael Burry argues that it's not even worth $50 per share. That's more than 60% below its present price.
Here's what you need to know.
What did Burry say, and why should you care?
If Burry's name rings a bell, it's likely because the story of his massively profitable bet against subprime mortgages back in the run-up to the financial crisis was featured in the 2015 film The Big Short (based on the 2010 book of the same name). His hedge fund -- Scion Capital -- dished out a return of nearly 490% between 2000 and 2008, with most of that gain materializing in the final year of that period.
While he no longer runs a hedge fund, Burry is still a very active and very vocal trader. Just last week, following President Donald Trump's public praise for the capabilities that Palantir's platform provides the U.S. military, Burry wrote in a Substack post, "I now own the [Palantir] June 17, 2027 Strike Price 50 Puts and the December 18, 2026 Strike Price 100 Puts. I am not selling these today."
Image source: Getty Images.
"Puts" are option-based bets that a stock or index will lose value. If and when it does, the value of the put rises. In this instance, Burry is betting that Palantir shares will fall to below $100 by the middle of December of this year, and be priced below $50 by June of next year. He won't necessarily need to wait until those dates to lock in any profits on either position, though. He can sell either put before the aforementioned expiration dates.
Burry goes on to say, "Trump's post rallied the stock after the stock had fallen 18% the last three days. The stock may catch a wind here ... [but] As mentioned, I continue to hold the puts, as I believe the fundamental value of this company is well under $50/share."
His argument holds at least a little bit of water.
What's (probably) bugging Burry
In full acknowledgment of how the real-world market often works, sometimes a company's story and premise are far bigger factors in its stock's price than its mere business performance.
This is one of those times. Despite Palantir shares' 36% pullback from their October peak, they're still up 2,000% since the end of 2022, shortly after the public launch of ChatGPT set off an artificial intelligence boom. At its current price, Palantir is outrageously priced at nearly 100 times this year's projected earnings of $1.30 per share.
NASDAQ: PLTR
Key Data Points
Sure, analysts are calling for earnings per share (EPS) to grow to $1.80 next year, en route to a little over $2.50 in 2028. Even so, the stock's still priced at more than 50 times its anticipated earnings for the year after next. That's a steep valuation. For comparison, the S&P 500's forward price-to-earnings ratio right now is a mere 21. Shares of artificial intelligence power Microsoft are only valued at 20 times next year's projected EPS of $18.22, while Google parent Alphabet's forward P/E ratio stands at about 25.
But an exciting story like Palantir Technologies can rise encumbered by mere valuation. That's often true -- right up until it isn't.
Just for the sake of argument, though, let's say -- as Burry may well sense -- that euphoria is capable of supporting this stock at a valuation that's more than twice that of even the most generously valued comparable peers. As veteran investors who lived through the dot-com crash of 2000 as well as the subprime mortgage meltdown that made Burry famous (and the solar mania of 2007, and the cannabis rush of 2017, and the meal kit buzz of 2020, and the GoPro-led action camera craze, and the explosion of 3D printing in 2013, etc.), the power of hype eventually yields to financial reality.
Artificial intelligence will arguably be more important than any of these other industries. Nevertheless, investors are already seeing that AI isn't quite living up to the initial hype. This is clearly undermining investors' willingness to continue supporting premium valuations for companies in the sector.
The kicker: While Palantir may be leading the decision-intelligence market, there's no significant barrier to entry into that business. The more that Palantir Technologies proves there's money to be made in this industry, the more likely it becomes that other motivated players, such as Alphabet or Microsoft, will move to carve out some of this opportunity for themselves.
Bottom line for interested investors
Who's right? Only time will tell. The arguments from both sides of the table make enough sense. The bulls as well as the bears may both be right in their own ways, in fact. It's possible that a year from now, Palantir shares will be trading somewhere between analysts' consensus targets and Burry's bearish forecasts.
The tough part for retail investors will be simply dealing with all of this high-profile drama in the meantime. This sort of noise not only skews reasonable perceptions, but also often spurs volatility that's difficult to digest.
As for anyone interested in taking a side here and putting money into it, you'll need to make a judgment call. That won't be easy to do. Just bear in mind that Burry can afford to be wrong, or at least be wrong for a long time. Most small investors don't have that luxury. Choosing not to play at all in this particular game could also be a smart choice.
