What happened
Data analytics stock Palantir Technologies (PLTR -3.72%) dropped 11.8% in December as investors continue to move away from growth stocks with high valuations. Similar stocks, including Splunk (SPLK) and Alteryx (AYX), had very similar charts throughout the month. This indicates that market forces are behind the move, which occurred without any significant news from Palantir.
PLTR, AYX, and SPLK total return data by YCharts.
So what
Palantir reported a strong quarter in November. The company exceeded analyst expectations with 36% revenue growth, and it reported losses that were in line with forecasts. Despite being unprofitable, Palantir is free-cash-flow positive. It also delivered a 45% increase in the number of corporate customers, which is good news for investors who are worried that the company relies too heavily on federal government contract revenue.
There wasn't much news after that overall positive report, but investors are getting more discerning about risk. The Fed's December commentary was the most hawkish since the start of the pandemic, and it looks like persistent inflation will force the central bank to raise rates fairly quickly. That's taking momentum away from growth stocks, specifically the ones with aggressive valuations.
Image source: Getty Images.
Now what
Palantir has excellent growth prospects, but it's still trading at a 23.7 price-to-sales ratio. That's expensive, and it will take years of growth to produce cash flows that reflect its share price.
There's every reason to be excited about this data analytics powerhouse, but the stock's valuation might be ahead of itself. Its $37 billion market cap simply isn't supported by any of its current business fundamentals. The company operates in a competitive environment, and the stock's price implies that everything will go smoothly over the next couple of years. Over the medium term, there's no upside on the basis of fundamentals. It can only meet the expectations implied by the stock's price, or it can disappoint. That creates risk for shareholders, which isn't popular right now.
Stocks are still expensive relative to historical valuation levels. As monetary policy slowly causes interest rates to inch higher, the highest-valuation stocks will struggle more and more to find momentum. Palantir could be a great long-term play, but it's going to be tough sledding for a few months at a minimum.
