Ranking among the most powerful but controversial firms, Palantir Technologies (NASDAQ: PLTR) is no stranger to the limelight. Since 2024, PLTR stock has skyrocketed to unbelievable heights, with the underlying big-data analytics core securing lucrative government and commercial contracts. However, the equity has also suffered badly in recent sessions, leading to a sizable decline.
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How large is the crimson wave? Since the start of the year, PLTR stock is down a bit more than 36%. In the past 52 weeks, shareholders have lost nearly 21% of market value. As multiple publications have pointed out, Palantir has incurred significant technical damage — which does raise the prospect of a contrarian trade.
So, the question lingers: is PLTR stock an upside opportunity right now?
It’s possible but I think we need to be mathematically honest about the risk associated with Palantir stock. Right now, there are three big assumptions regarding the bullish case for PLTR, which is as follows:
- Palantir’s core business will continue to be fundamentally sound.
- PLTR’s big decline will attract discount-seeking buyers.
- Weaker-handed investors will continue to maintain their stake.
For those who are optimistic about Palantir’s sustained relevance, I imagine they may assign a 95% confidence level on this one factor. However, the bigger problem is the technical issues presented in bullet points two and three. Because of the sharp decline in PLTR stock, the confidence level would be around 60% each, if we’re being super-generous.
Where does that leave us? The compounded probability that all three factors will turn true simultaneously is only 36% (0.95 x 0.6 x 0.6 = 0.36). That’s why fundamental analysis toward a volatile name like Palantir represents a massive challenge. After all, the equities market is a non-deterministic system. In other words, the answer to the problem will only materialize sometime in the future. As such, the assumptions undergirding a forward-looking analysis is multiplicative, not additive.
Laying Down a Rational Framework for PLTR Stock
While some experts may build a case for buying PLTR stock right now, this thinking process is flawed because of the underlying volatility. You can only really build a case when the event in question has occurred in the past, such as a criminal trial. In this situation, the crime has actually happened. Therefore, any evidence forwarded helps to narrow the probability space of how the crime occurred.
But when it comes to the equities market, the event hasn’t happened yet. Therefore, analysts aren’t adding evidence but introducing assumptions. And these assumptions must turn out true in the proper sequence for the expected result to materialize as forecasted. Essentially, true equities analysis doesn’t involve building a case but minimizing confidence degradation.
When forecasting a blue-chip giant, the core assumptions inherently carry high confidence. As such, the compounded probability that the investment will provide a net positive return remains robust. Unfortunately, a volatile entity like PLTR stock lacks a high confidence level in at least one major assumption. Subsequently, this lack of confidence degrades the compounded probability of the event being forecasted.
How do we get around this problem? Rather than trying to predict a specific outcome, we can observe the underlying structures that lead to certain results.
For example, Amazon (NASDAQ:AMZN) doesn’t attempt to predict what you will buy next. Instead, it looks at dynamic structures that incentivize certain purchases — such as stocking up on umbrellas as a thunderstorm approaches. What Amazon has discovered is that as conditions change, consumer behaviors also change. Getting ahead of this shift allows the e-commerce giant to streamline its logistics.
We can apply the same principle with Palantir stock. There should be a noticeable difference between trading PLTR randomly versus waiting for a specific signal, such as coming off a series of bearish sessions.
Being Deliberate with Palantir Stock
Let’s take a closer look at the performance odds of PLTR stock. If you bought shares randomly and held them for a 10-week period, you would be looking at a solidly positive return, with an expected forward distribution between $110 and $122 (assuming a starting price of $113.50, Wednesday’s close). Further, probability density would likely peak at around $118.
Essentially, you stand a decent chance of generating a nearly 4% return. That’s not going to move the needle if you’re only buying a few shares. However, with the leverage of options, that possible 4% pop may translate into a robust reward.
However, the question now is, would buying Palantir stock today be worthwhile? The answer would only be “yes” if there is a positive incentive to buy PLTR relative to the random baseline. In the last 10 weeks, PLTR printed only three up weeks, leading to an overall downward slope. Therefore, this 3-7-D signal must deliver better results than the random guesser.
But when we analyze PLTR stock when coming off a 3-7-D, the forward 10-week distribution isn’t particularly great, with an expected range between $105 and $125. Yes, there’s more upside lying in the wings but the downside risk has also expanded unfavorably. Using the data at hand, Palantir is not the most welcoming contrarian opportunity.
Still, the wrinkle is that within the first three weeks of the 3-7-D signal flashing, PLTR stock has a tendency of swinging higher — potentially to around the $120 level. I made the same argument for Palantir back in May and sure enough, shares did enjoy a conspicuous pop before succumbing to choppiness.
Will lightning strike twice? Obviously, no one can answer that question because an inference is never logically necessary: PLTR stock can ultimately do whatever it wants. Nevertheless, if you believe in recurring patterns, I’d check out the 119/120 bull call spread expiring July 17.
As stated above, the history of PLTR stock coming off the 3-7-D signal shows it consistently reaching $120 on a median basis over the next three weeks. With a net debit of only $40 per spread and a maximum payout of 150% on tap, Palantir offers a tempting proposition — but only for the most risk-tolerant speculator.
For those who can’t handle the heat? You may want to sit this one out.
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