Palantir Soars Ahead of Earnings: What's The Best Way To Handle?

Key Points

• Palantir Technologies stock surges 20% ahead of Q2 earnings.
• Analyst Dan Ives initiates "outperform" rating with $25 price target, saying the stock is an undiscovered AI play with significant market potential.
• A sharp gap-up after earnings could still offer a buying opportunity, but investors should keep the purchase price within 5% of the gap-up price.
• Palantir's Q2 report on August 7, and its outlook, could sway investor sentiment.

Watching a stock soar ahead of earnings, like we’re seeing now with data analytics software maker Palantir Technologies Inc. NYSE: PLTR can be frustrating. 

Palantir, which one analyst touts as one of the best machine learning and AI stocks on the market, is making some big moves just days before its earnings report. 

On the one hand, a higher heavy-volume gap is generally an indication of more gains to follow in the coming weeks and months. That makes it tough to avoid chasing the stock higher.  

On the other hand, any surprise in the upcoming earnings report can send the stock sharply lower, and put your new trade in the “loss” column.

Wedbush Initiated Coverage With "Outperform" Rating

Palantir shares gapped up 11.40% on July 31, and tacked on additional gains on August 1, after Wedbush analyst Dan Ives initiated coverage with a rating of “outperform” and a price target of $25. As you can see on MarketBeat’s Palantir Technologies analyst ratings page, Ives sees a significant price increase in the coming months.

The company reports second-quarter earnings on Monday, August 7, ahead of the opening bell. It’s that timing that could present investors with a quandary about handling the stock. Analysts expect the company to earn 5 cents a share on revenue of $530.63 million. On the bottom line, that would be an increase over a penny-per-share loss a year ago. On the top line, that would be an increase of 12%.

In a media appearance on CNBC following his research note, Ives said Palantir is “still undiscovered as a broader AI play.” 

He added that the company has a path to monetize what he views as potentially a trillion-dollar market opportunity. 

Do Investors Understand Palantir's Potential? 

Ives, whose price target was a 54.89% upside from its price on the report date, said institutional investors have not recognized the full potential of Palantir. 

Part of the problem, Ives said, was Palantir’s focus on government and military customers, although it’s expanding its corporate and enterprise business. 

“If you are an enterprise CEO looking for an AI platform, Palantir is potentially the first call,” Ives told CNBC. 

While corporations have been tightening their belts, announcing spending cuts in some categories, Ives says he’s seeing an uptick in AI spending. 

Meta Platforms Inc. NASDAQ: META and Microsoft Corp. NASDAQ: MSFT are among the companies boosting AI capital spending while slashing costs in other areas. 

Risky To Buy Close To Earnings Report

While Ives’ enthusiasm and the sharp gains in the stock suggest that Palantir has more room to run, there’s still a risk in buying close to the earnings report. 

Despite the upbeat forecasts, there’s no way of knowing whether Palantir, or any company, will beat, meet or miss views in any given quarter. 

In fact, MarketBeat’s Palantir Technologies earnings data reveal an erratic history in that category.

A look at the Palantir Technologies chart shows the stock got a bump following its first-quarter report in May. In the past three months, Palantir shares are up 156%. The stock is up 209.03% year-to-date. 

A Stock Can Retreat Even If It Beats

But even with those stellar gains, there’s an argument to be made that the stock is ripe for a pullback. It’s not unusual for a stock to retreat even after beating analysts’ views. That usually happens if analysts’ “whisper number” for earnings was higher than the company reported, or if guidance is weak. 

For an investor with only a small gain in a stock, a post-earnings pullback can quickly reverse into a significant loss. 

However, it can be painful to see a stock go off to the races, while you opted against a buy. 

A more conservative tactic is to simply wait until after the report. That takes away near-term downside risk. But the drawback there is: If the stock gaps up sharply and rallies above a typical buy point, the breakaway gap could still offer a buy opportunity. 

To handle that situation, if you choose to buy, keep your purchase price within 5% of the stock’s price in the first five minutes after the gap-up. That limits your exposure if the stock retreats soon after gapping higher.