Investors are closely monitoring the valuation of AI stocks as concerns about potential overvaluation loom large. With companies like Meta experiencing a decline post-earnings due to high capital expenditure without clear revenue growth paths, all eyes are now on Palantir (PLTR), another AI-focused company trading at a rich valuation. The risk of a pullback in these stocks is exacerbated by the possibility of increased interest rates from the Federal Reserve.
PLTR, currently trading above $21, is showing signs of weakness as momentum has turned negative, testing the $21 support level. Analysts are expressing concerns over PLTR’s sky-high valuation metrics, with an EV to sales ratio of over 21x, considering modest revenue growth projections of just 13% in the coming years. This places PLTR in the same league as fast-growing tech companies with much slower growth rates.
In light of these developments, investors are eyeing options to profit from a potential pullback in PLTR’s stock. By purchasing $22 Puts expiring on May 31st weekly, traders can gain significant downside exposure with limited risk. The strategy involves a $1.95 investment per contract for a total risk of $195 if PLTR remains above $22 at expiration. However, a move down to the $17.70 gap fill level could yield a 120% gain on the put options.
In conclusion, the market sentiment surrounding AI stocks, particularly those trading at rich valuations, is cautious. It remains to be seen how these companies will navigate the challenges posed by high expenditure and modest revenue growth in the face of potential interest rate hikes. Investors are advised to exercise caution and consider all options available to mitigate risks and capitalize on market fluctuations.
