The S&P 500 (^GSPC) has plummeted 4% year to date, and President Trump’s unorthodox trade policies have cast a shadow of economic uncertainty over the market. Companies are spending on artificial intelligence, but Wall Street recommends selling Palantir Technologies (PLTR) and Upstart Holdings (UPST) due to their high valuations.

Palantir Technologies: A High-Valuation AI Platform

Palantir develops data analytics software for the commercial and government sectors. Its core platforms, Gotham and Foundry, enable customers to integrate and query complex data with analytical tools and machine learning models to surface insights. The artificial intelligence platform (AIP) adds support for large language models and natural language processing, which allows customers to use generative AI to improve operational efficiency. Management claims that Palantir is unique in its ability to operationalize AI, meaning it can help customers move AI capabilities from prototype to production more effectively than other vendors. Forrester Research recently corroborated this claim to some degree by ranking Palantir as the technology leader in artificial intelligence and machine learning platforms. Palantir reported strong first-quarter financial results, with total customers climbing 39% to 769 and the average existing customer spending 124% more. Revenue rose 39% to $884 million, and non-GAAP earnings increased 62% to $0.13 per diluted share. However, management raised full-year guidance, and the stock still fell sharply the next day due to concerns about valuation. Palantir’s forward price-to-sales (PS) ratio is more than three times higher than the next closest software company, CrowdStrike. This puts investors in a tricky position, as Palantir’s business is firing on all cylinders, but the stock trades at an absurdly expensive valuation. Investors can reconcile these opposing truths by building a position slowly, waiting for a cheaper entry point. Personally, I would wait for a more affordable entry point, as I think Palantir stock could fall 60% or more. However, investors comfortable with that possibility can buy a small position today if they are eager to own shares. The goal should be to purchase additional shares at progressively cheaper valuation multiples.

Upstart Holdings: A High-Risk, High-Reward AI Lending Platform

Upstart provides an AI lending platform that helps banks and credit unions automate and improve credit decisions. The traditional FICO score has limitations, incorporating less than two dozen data points and often failing to quantify credit risk accurately. Upstart, on the other hand, considers over 2,500 variables and improves with each new data point, allowing lenders to approve more borrowers at lower interest rates. An internal study found that Upstart AI approves twice as many applicants at an average APR 38% below traditional lending models. Upstart reported solid financial results in the first quarter, beating expectations on the top and bottom lines. Revenue increased 67% to $2.1 billion, and the number of loan originations doubled. The company also reported positive non-GAAP earnings of $0.30 per diluted share. The Upstart ecosystem includes banks and credit unions that use its software to originate loans, as well as institutional investors that purchase loans directly or as securitized products. Theoretically, demand should increase over time as the company generates more data to inform its machine learning models. However, Upstart’s business is highly dependent on the economic environment, which could impact its performance. The outlook is mixed, with the Federal Reserve expected to cut rates several times this year, which could boost demand for credit. However, tariffs imposed by President Trump could cause a meaningful slowdown in the economy, leading lenders to be more cautious about extending credit. Investors should be aware of this risk.

Key Takeaways

• Palantir Technologies and Upstart Holdings are recommended for sale due to their high valuations.
• The S&P 500 has plummeted 4% year to date, casting a shadow of economic uncertainty.
• Palantir’s business is firing on all cylinders, but its stock trades at an absurdly expensive valuation.
• Upstart’s AI lending platform has the potential to revolutionize credit decisions, but its business is highly dependent on the economic environment.

Investment Strategy

1. Build a position slowly and wait for a cheaper entry point for Palantir Technologies.
2. Buy a small position today if investors are eager to own shares of Palantir.
3. Purchase additional shares at progressively cheaper valuation multiples.
4. For Upstart Holdings, consider the potential for a high-risk, high-reward investment, but be aware of the economic risks.

Conclusion

The S&P 500’s slide amidst economic uncertainty has raised concerns about the market’s trajectory. Palantir Technologies and Upstart Holdings are recommended for sale due to their high valuations. Investors should consider building a position slowly for Palantir and being cautious with Upstart’s high-risk, high-reward investment. By being aware of the economic risks and taking a thoughtful approach, investors can navigate this uncertain market and make informed decisions.