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While predicting the future on Wall Street isn’t foolproof, looking at historical and statistical trends can provide some insights.
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One of the standout stocks in the artificial intelligence (AI) sector appears to be riding a wave that’s likely to crash.
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Simultaneously, companies that are applying unconventional operational strategies are facing serious challenges.
For more than a century, Wall Street has been a place where wealth is forged. The journey from point A to B is rarely straightforward, but no other asset class has consistently matched stock returns over the past century.
While patience often yields rewards, investors continue to chase the hottest stocks, hoping for game-changing returns in quicker timeframes. When the primary stock indexes start to dip, our thoughts often turn to emotionally driven investments. It’s interesting how the fear of missing out, or “FOMO,” tends to kick in especially when a stock starts delivering impressive gains.
It’s worth noting that accurately predicting the peak of a stock or major index is quite a challenge. If there were sure-fire metrics that could forecast market movements with absolute certainty, everyone would rely on them.
Nonetheless, certain historical events and data points have shown a strong correlation with the ups and downs of major stock indexes or specific sectors. Two of the top-performing stocks in Wall Street’s recent history appear to be thriving on borrowed time.
The first stock, often viewed as impervious to downturns during the significant bubble, is Palantir Technologies (NASDAQ: PLTR), which has seen its value soar over 2,000% since the start of 2023.
However, while I think Palantir is experiencing a massive bubble, that doesn’t undermine the strength of the company itself. Its core business remains strong, although its current valuation might be unsustainable.
Investors have been drawn to Palantir due to its unique competitive edge. Tools like Gotham and Foundry offer capabilities that don’t have direct competition, allowing Palantir to maintain a steady cash flow that surpasses Wall Street expectations.
Palantir experiences significant annual growth, generating consistent revenue by leveraging U.S. government data for military operations. This relationship guarantees payment, ensuring a reliable income stream.
However, despite its advantageous position, there are significant issues tied to historical and statistical data that can’t be ignored. Technology companies that have revolutionized industries over the last few decades often face a bubble burst early in their expansion phases. The fact that many firms struggle to effectively implement their AI solutions or generate strong returns underscores that early utility and broad acceptance of these innovations might be overestimated.
While Palantir’s business model—relying on government contracts and a subscription service—offers some resilience in case of an AI bust, the sentiment surrounding its stock remains heavily weighted.
Another pressing concern is Palantir’s valuation, particularly its price-to-sales (P/S) ratio. Typically, innovative mega-cap stocks see P/S ratios peak between 30 and 43, while Palantir’s has shot up to 108 times its annual sales as of June 12.
This discrepancy suggests that Palantir could stagnate over the next several years, with its P/S ratio potentially adjusting closer to historical norms that accompanied previous market corrections. The current valuation far exceeds anything rational, prompting concerns that the stock price is on a downward trajectory.
In addition to Palantir, another stock—formerly MicroStrategy, now known simply as Strategy (NASDAQ: MSTR)—has increased almost 2,600% since early 2023, largely thanks to its CEO Michael Saylor’s bullish stance on Bitcoin (BTC).
Investors have been attracted to this strategy, as Bitcoin is recognized as a dominant digital currency with a capped supply of 21 million coins, enhancing its perceived value.
As of June 9, Strategy reported spending around $40.8 billion on 582,000 Bitcoins, which accounts for roughly 2.77% of all Bitcoin in existence.
This strategy seems to have worked so far, but there’s a lingering feeling that it might not be sustainable in the long run.
Historically, these leverage-centric models have ended poorly for investors; past events, like subprime mortgage securities, serve as warnings of potential pitfalls.
Strategy has utilized its stock—both preferred and common shares—to finance its Bitcoin acquisitions, helping to prop up prices. Yet, history suggests that such models are not sustainable.
Bitcoin has experienced several drops of at least 50% since its inception. If Strategy fails to meet its financial obligations, it might be forced to offload its Bitcoin holdings at bad prices, a scenario that could play out in a downturn. This creates inherent risk for the company’s heavily leveraged approach.
The valuation of Strategy’s Bitcoin assets is also concerning. At a price of $103,868 per Bitcoin, the total value of its holdings stands at $60.45 billion. Yet, the company’s market capitalization implies that investors are effectively paying a staggering premium to hold Bitcoin through Strategy—$180,588 rather than $103,868.
This situation seems unreasonable and unsustainable.
Furthermore, the competitive advantages originally touted for Bitcoin have been diminished or misunderstood. Its supposed rarity is controlled by code, which could theoretically change, and its utility in real-world applications has shown significant flaws.
Given all this, it’s reasonable to anticipate that the next downturn could hit Strategy hard.
So, if you’re considering investing in Palantir Technologies, it might be wise to think twice.
