Why Palantir Stock Plummeted This Week

Key Points

• Citron Research released a note that compared Palantir's valuation to the valuation implied by OpenAI's latest funding round.

• Palantir's stock trades at a P/S ratio of 115, nearly 7 times higher than OpenAI's implied valuation of 17 times sales.

• Palantir's current valuation is disconnected from fundamentals.

• 10 stocks we like better than Palantir Technologies ›

Shares of Palantir (NASDAQ: PLTR) fell this week. The stock is down from last week's close by 9.5% as of 1:59 p.m. ET on Friday. The drop comes as the S&P 500 gained 0.4% and the Nasdaq-100 lost 0.7%.

A favorite of retail traders, Palantir's stock was sliding this week after a short report from a notable short seller compared the company's valuation to the implied valuation of OpenAI after its latest funding round.

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Palantir's sales multiple dwarfs OpenAI's

Citron Research, the short seller behind the GameStop imbroglio, released a note immediately following news that OpenAI was raising another $6 billion at a $500 billion valuation. Citron pointed out that this means OpenAI's implied price-to-sales (P/S) ratio is 17 and that this would make it by far one of the most expensive software-as-a-service (SaaS) stocks ever. In fact, a P/S of 17 gives OpenAI the "highest multiple of any scaled SaaS stock in the world."

Though Palantir's stock price has fallen this week since the short report, it still carries a P/S of 115 -- nearly 7 times that of OpenAI. OpenAI is one of the most influential companies in decades and is growing at a lightning pace -- a pace that far outstrips Palantir's -- yet Palantir's stock is significantly higher.

Image source: Getty Images.

If Palantir stock traded with the same multiple, 17 times sales, it would be priced at $40 a share -- and it would still be one of the most expensive SaaS stocks on the market. Citron says this is not rational, and I agree.

Palantir is undoubtedly a strong company, but its stock is just too expensive. I would avoid it.

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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.