Why Palantir Stock Is Plummeting Today

Key Points

• Citron pointed out that if you take the implied sales multiple from OpenAI's latest valuation, PLTR would trade at roughly $40 per share.

• Palantir stock trades at roughly 7.5 times that of OpenAI’s implied sales multiple.

• To justify today’s valuation, Palantir must sustain rapid growth and margin gains for many years.

• 10 stocks we like better than Palantir Technologies ›

Shares of Palantir (NASDAQ: PLTR) are falling on Tuesday, down 6.9% as of 11:02 a.m. ET. The drop comes as the S&P 500 (SNPINDEX: ^GSPC) lost 0.2% and the Nasdaq Composite (NASDAQINDEX: ^IXIC) dropped 1%.

Palantir, the AI pioneer, was the target of a short report from Citron Research, one of the most prominent short sellers on the market.

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Citron says Palantir's valuation is irrational

Citron cited the most recent valuation of OpenAI, which on Friday was confirmed to be raising another $6 billion in funds at a $500 billion valuation, as proof that Palantir's stock is overvalued.

The short seller points out that this $500 billion valuation puts OpenAI's price-to-sales (P/S) at roughly 17x. If you apply the same P/S to Palantir, the stock would trade at just $40, a steep drop from today's $162 per share.

Citron went on to say that at this P/S of just shy of 17, OpenAI "has the highest multiple of any scaled SaaS stock in the world," and that this multiple "in itself is extreme," meaning that for Palantir, even at $40 a share, it would still be an incredibly expensive stock.

Image source: Getty Images.

Investor beware

While short reports should always be taken with a heavy grain of salt (after all, the company profits off of a drop in Palantir's stock price), I have to agree with Citron's evaluation -- and have been saying so for some time now.

The scale and pace of OpenAI's growth and the potential it has to transform the entire economy far outweigh that of Palantir. Yet its stock carries a P/S almost 7.5 times higher than OpenAI's (if it were publicly traded).

I would note that there is one major caveat: Palantir is profitable, something that OpenAI decidedly is not (it is burning cash at an incredible pace). Still, the point stands, given the disparity between the two valuations.

Palantir has to continue growing at a breakneck pace for many, many years to begin to justify this. That level of perfection is just not reasonable.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.