As a Former Professional Short-Seller, I Would Never Short Palantir Stock. Here's Why.
There is no denying that Palantir has a high valuation.
However, as a former professional short-seller, I learned to never short a stock on valuation alone.
Meanwhile, the opportunity in front of Palantir is so large that the company still has strong upside over the long term.
10 stocks we like better than Palantir Technologies ›
For several years, I worked as an equity analyst at a long-short hedge fund, with around $600 million in assets under management. While our long book would be larger than our short book, we would be short many more stocks than we would be long in. Typically, we might hold around 15 core long positions, while we could be short more than 70 stocks.
The reason for this was quite simple. On the long side, we typically had a more concentrated portfolio in highly researched names that we had high conviction in. However, shorting individual stocks is inherently riskier, so we would keep individual positions small.
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Since stocks can technically go up indefinitely, you can lose much more than you can make. Meanwhile, if a short goes against you and the stock price goes up, the position size becomes larger, not smaller. This can lead to margin calls, which typically leads to short-sellers being forced to buy back the stock they shorted at a loss.
So why short-sell at all? For one, it's a market hedge. But more importantly, most stocks actually do underperform. According to a JP Morgan Asset Management study, between 1980 and 2020, 40% of stocks in the Russell 3000 index -- which consists of the 3,000 largest U.S. traded stocks -- suffered catastrophic losses of 70% or more from which they never recovered. Meanwhile, 42% of the stocks in the index had negative returns during this period. In addition, two-thirds of stocks underperformed the index.
However, one lesson I learned when looking for stocks to short is never to short on valuation alone.
Palantir and its high valuation
If there was ever a candidate to short solely on valuation, it would be Palantir Technologies (NASDAQ: PLTR). After all, the stock trades at an astonishing 82.5 forward price-to-sales (P/S) multiple. Note that this is sales, not earnings.
However, valuation is not a reason to short a good company without a near-term downward catalyst. The reason for this can be summed up by an old Wall Street adage that is attributed to the British economist John Maynard Keynes: "The market can stay irrational longer than you can stay solvent."
In the context of short-selling, this basically means that a stock can carry high valuation for a very long time, much longer than a short-seller can continue to hold a position.
So, while Palantir's valuation may look extreme, the same could have also been said when it traded at 30 times sales or 60 times sales. After all, at the height of software-as-a-service (SaaS) valuations a few years ago, the average SaaS stock only got up to around a 20 times P/S multiple with over 30% revenue growth.
Meanwhile, the company has been executing strongly. Its revenue growth has accelerated each of the past seven quarters and grew 39% in the first quarter. While high valuations can make a stock more vulnerable to any missteps or disappointments around quarterly earnings, Palantir right now has been firing on all cylinders.
O.K., but would you buy the stock?
Whether to buy Palantir stock is a trickier question to answer, but there is reason to believe that the company could eventually grow to become one of the largest in the world. It started out as a data-gathering and analytics company primarily for the U.S. government, where its technology could be used to discover complex patterns, enabling the government to help track terrorists. But with the advent of artificial intelligence (AI), it has become a major player in the commercial space.
Instead of looking to build a better AI model, Palantir set out to make AI more actionable through its data gathering and analytical capabilities. Its Artificial Intelligence Platform (AIP) gathers data from a variety of different sources and then connects the data to its real-world counterparts. This essentially turns AIP into an operating system where customers use AI models to find solutions to real-world problems.
Today, AIP is being used across an array of industries for remarkably diverse tasks. These include monitoring for sepsis at hospitals, helping a homebuilder streamline its land-development bidding process, and improving the logistics and supply chain of a cereal maker.
The U.S. government uses its technology for mission-critical tasks, including on the battlefield. And even NATO recently signed a big deal with the company.
The breadth of uses for AIP and Palantir's technology is extraordinary and is the reason the company has the potential to grow into one of the biggest in the world.
As such, while I would prefer to buy the stock on a dip given its valuation, I think it has a very good opportunity to be a huge long-term winner.
Should you invest $1,000 in Palantir Technologies right now?
Before you buy stock in Palantir Technologies, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $671,477!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,010,880!*
Now, it's worth noting Stock Advisor 's total average return is1,047% — a market-crushing outperformance compared to180%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor.
See the 10 stocks »
*Stock Advisor returns as of July 7, 2025
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