You can’t eliminate speculation or irrational exuberance, especially when they’re profitable. There’s no way to instruct the insiders at Palantir, the big data analytics company, to cash out on their investments, nor can you prevent the executives of Applovin from selling their shares at this point. Additionally, you can’t convince investors in that mobile gaming advertising firm that its worth might not be as high as they believe. If only we could. We long for a rational market devoid of stocks skyrocketing on mere speculation. We want these investors to exit the scene because we don’t want publicly traded companies on the NYSE to behave like reckless gamblers, nor the Nasdaq 100 to transform into a circus of sorts. Various indicators of speculation and retail enthusiasm are already signaling warnings, though they’re not yet at alarming levels. Palantir and Applovin exemplify the current challenges we face. Both stocks behave similarly to GameStop during its meme stock phenomenon, but unlike GameStop, these are genuine companies with tangible operations.
Many rely on Palantir to revolutionize operations within the Pentagon. Its stock appears reasonably priced, especially when applying the Rule of 40, which considers the sum of its growth rate and free cash flow margin; Palantir easily surpasses 40, well above 50, which justifies the premium institutional investors are willing to pay, much like they do for the highly regarded ServiceNow. Yes, Palantir is indeed profitable, run by the brilliant yet notoriously arrogant Alex Karp, who dismisses those wanting to share his narrative as if slicing through butter. His disdain is palpable, making one wish for the stock to plummet, even while acknowledging the potential they represent in helping the Pentagon evolve away from risking human lives.
One certainty about this $173 billion company is that there are individuals who purchase its stock in small increments, slowly driving its price up, as there are few sellers willing to part with their shares at that time, only those with high sell orders that barely get executed. I observe it rise, hoping these buyers eventually face harsh consequences because this “walk-up” tactic frustrates me. It’s a battle of wills, with buyers consistently succeeding while sellers struggle. Each morning, the bulls dominate the bears, and because of this consistent victory reflected in the stock price, a sense of invincibility permeates the market, likely affecting other similar growth stocks that remain unscathed.
In a perverted sense, I wish for a pump-and-dump scheme to materialize, so we could dismiss the stock and its buyers as part of a fleeting trend. Instead, what we face is a real company, real stock, and true profits to be reaped, yet the present buyers maintain a firm belief that Palantir’s stock is on a trajectory for further gains. With a market cap of $173 billion, where will it stop? $200 billion? $300 billion? Do the specific figures even matter to these investors? My certainty about their behavior comes from my own experience in a similar environment. Back in the roaring 1980s, while working at Goldman Sachs, I was immersed in the excitement of trading and market dynamics. I had memorized the prices of hundreds of stocks and observed a clear pattern: stocks reaching $80 would typically climb to $90, then $100, $110, and often split—usually in 3-for-1 ratios. I was aware that my rationale was flimsy, almost absurd, but it worked; the results were evident.
Working with sales associates who had strong relationships with New York’s wealthiest clientele, I played by the book and targeted clients where I could, sharing predictions that often proved correct. Yet my insights were frequently dismissed. Eventually, I amassed significant gains, prompting interest in my recommendations. This pattern persisted for over a year until I decided to step back, having successfully identified the trend and seeing no further value to add.
Today’s investors in stocks like Palantir are the equally eager newcomers who consistently succeed. However, I fear they lack the discipline to withdraw while they’re winning, unlike my own experience following a tough trading period. They appear oblivious to the lessons learned from past market crashes, like the one in ’87, where many stocks were obliterated, and profits vanished.
As for Applovin, it resembles Palantir in many ways. The buyers driving its stock price upward seem unsuspecting of what the company truly represents. They don’t grasp its role in enterprise software for mobile game advertising or its budding e-commerce initiatives. This ignorance might position the stock for significant growth before analysts even issue favorable ratings or target prices. Investors, who rise early each day, are motivated by a love for Applovin and an impression of being ahead of the curve, not realizing that insiders may unwittingly hinder their potential.
The competition only ends when a substantial rival emerges and threatens profit margins, which could take significant time to develop. Therefore, I can’t predict when this upward trend will cease. Applovin reflects a legitimate enterprise with promising prospects and earnings growth that can justify ambitious price targets, though any forthcoming issues appear manageable.
Why is all this important? Why do I care? Perhaps there’s envy that established portfolios miss out on such exhilarating runs. Maybe it’s a reflection of past experiences reminding me that the market won’t stabilize until the credibility of seasoned investors is undermined. But ultimately, it’s the caution inspired by witnessing behavior that transcends companies with standout potential like Palantir or Applovin, steering us toward the unpredictable realms of meme stocks like GameStop and AMC, which often fall prey to savvy hedge fund managers. This results in a clash where new investors believe they’re right, while established players are portrayed as the villains looking to profit off their inexperience.
In essence, we find ourselves in a delicate situation where rampant speculation is both prominent and prevailing. As long as these speculators continue to dominate, the market resembles a casino more than ever, rendering discussions about the fundamental values of companies like Salesforce or Nvidia seem trivial. It’s essential to remain vigilant against this shadowy market, which, although still tucked away for now, poses risks if it becomes mainstream. When that day comes—and I suspect it may be sooner than anticipated—we will have to refine our strategies to brace for an impending shift.
In the meantime, we must persist, hoping these speculative trends diminish before we return to a more stable bull market. We will further examine these dynamics in our upcoming December Monthly Meeting. As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll be notified about trades before they’re executed, with specific waiting periods based on prior discussions.
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