Prediction: Palantir's Stock Will Make a Huge Move After May 5

Palantir Technologies (NASDAQ: PLTR) may be one of the most polarizing AI stocks on the market. Some swear by it, and others wouldn't touch it with a 10-foot pole. I'm usually in the 10-foot pole camp, but I would happily change my stance if the stock returned to a reasonable level.

After the most recent round of sell-offs, Palantir stock is around 25% off its all-time high. This is a pretty significant discount to where it was trading, but is it enough to warrant buying the stock before Palantir reports Q1 earnings on May 5?

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Palantir's stock has seen big movements following earnings lately

One thing I'm fairly certain of is that Palantir's stock will likely make a large move on the day following earnings; the question is whether that move will be up or down. For three of its four 2024 quarters, Palantir's stock moved up following earnings. But all four saw double-digit movements.

Data source: YCharts and Palantir.

So, which way will Palantir's stock move after its Q1 earnings report on May 5?

The bull case: Palantir has a history of beating expectations

Palantir's management team typically under-guides revenue and over-delivers in the actual announcement. This is far better than the alternative, so I won't dock any points because of management's strategy.

Management predicts 36% growth for Q1, the exact same rate it posted during Q4. Historically, investors should expect a percentage point or two higher than this, but we'll see what management delivers.

Even more important than that is Palantir's outlook, which could be harmed by economic sentiment. It's no secret that Palantir's software isn't cheap. This is evidenced by the fact that it only has 711 total commercial customers, which generated $372 million in revenue during Q4. If you annualize that figure and divide it by the customer count, you get an average customer value of $2.09 million, which excludes many companies from using Palantir's product.

However, if Palantir's potential customers see this software as mission-critical and a way to drive efficiencies, then it could be a no-brainer spending item, contributing to Palantir's management giving upbeat guidance for the rest of the year.

While this is the bull case for Palantir and one that I mostly agree will come true, the valuation is just too high for me, so I think the stock will move lower following Q1's earnings announcement.

The bear case: Palantir's stock is overpriced

Although it's a rare position, I'm bullish on Palantir as a company but bearish on its stock. The company trades at a sky-high premium, even after the marketwide sell-off that tanked its stock.

PLTR PE Ratio (Forward) data by YCharts

Figures of 167 times forward earnings and 79 times sales are outrageous price tags for any stock, let alone one that's only expected to grow revenue by 36% in the quarter.

Most software companies trade between 10 and 20 times sales, so Palantir's nearly 80 times sales is absurd. This price tag might be justifiable if Palantir doubled or tripled its revenue each quarter, but it hasn't.

This price tag indicates that years of growth have already been priced into the stock. For Palantir to return to the high end of where most software companies trade at (20 times sales), Palantir's revenue would need to grow at a 40% pace for over four years. Keep in mind that's with a growth rate far higher than management predicts, and the stock price not rising.

As a result, I think Palantir's stock will sell off following Q1 earnings. The expectations built into the stock are just too high to warrant it rising any higher in an environment where economic fear and pessimism are rampant. There are plenty of other stocks that look like great deals right now, and Palantir should be the last place investors look.

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Keithen Drury 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.