PLTR fights vs a tough competitor
PLTR fights vs a tough competitor
Palantir price faces pressure from an invisible challenger
Editor: @Emanuele20x
PLTR 0.00%↑ price is down ~60% from the beginning of the year and ~80% from its peak.
Meanwhile, Palantir's business grew +47% Revenues and 2x the Client Count from 20q4.
What caused the price disruption? Two simple words: interest rates.
The slowdown of the Government (PLTR Government slowdown: not Palantir's fault) created more pressure on the multiples, but interest rates were the major cause that pressured sector multiples to multi-year lows (PLTR Reverse DCF: what is the current price implying?).
Bonds rule. Equity follows
Raising interest rates creates pressure on all stocks because a “risk-free” alternative by definition is more appealing than a “risky” alternative at the same yield.
This is the reason why the Dividend Stocks offering virtually no growth face immense competition from a 2y Treasury at 4.3% and a 10y Treasury at 4%.
Perceived safety can be risky. Why be exposed to more risk to obtain less return?
Great companies like Coca-Cola increase dividends over time, but to reach 4% from 3%, you would need 3y of ~10% dividend increase to get the same yield that you could get risk-free. At that point, I would prefer the risk-free alternative.
This, however, is not limited to “dividend stocks” only.
When risk-free yields raise, all stocks become relatively less attractive.
The divergence between the Earnings Yield, which is the inverse of the P/E, and the 10y Treasury Yield is called “Equity Premium”. For example, a P/E of 20x = 5% Earnings Yield (1/20), while a P/E of 10x = 10% Earning Yield (1/10).
Equity Risk Premium = Earnings Yield - 10Y Risk Free Yield
To invest in a riskier asset I want a higher return. Therefore, Equity must yield more than the risk-free alternative.
Typically, Equity delivers 3-4% additional return over the risk free alternative.
Right now, 10y Treasury yields ~4% and the S&P500 Earning Yield is at ~6%.
Equity pays only ~2% above the risk-free alternative, which indicates that Equity is not particularly attractive compared to Bonds.
If Yields don’t go lower (meaning prices of Bonds rise), Equity is still vulnerable to a further 20/30% downside to providing an adequate return in comparison to the risk-free alternative.
Back to Palantir
Palantir is included in the riskiest segment of the Equity space, as discussed in the previous article (Palantir Costs Less than Coca-Cola). As a consequence, its valuation has a high sensitivity to rising interest rates.
A potential increase in the Yield of the 10y Treasury would create even more pressure on the Equity market, even more on “growth stocks” like Palantir.
On the other hand, if the 10y Treasury Yield contracts because the market becomes confident the inflation will become “under control”, rates could be progressively lowered over time. This will create a boost for the more “speculative” segments of the equity markets, supporting Palantir’s valuation.
I don’t know where the market will go. As investors, we need to understand the big picture and be positioned in a way that we could benefit from excesses.
When the yields were too low, “growth stocks” were extremely risky. Now the yields are relatively high, and there are strong chances that the best “growth stocks” are extremely undervalued. Therefore it is crucial to be positioned in a way where we could benefit from whatever macro scenario happens.
I discussed how I am positioned and the rationale behind my decisions in my portfolio updates (Laorca Portfolio Update).
Yours,
Arny
Join me on:
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View expresses are my own. Do not represent Financial Advice.
I own (many) PLTR 2.45%↑ stocks.