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Sam.
Jim Cramer (1:54)
Hey, I'm Kramer. We welcome to Mad Money. Welcome to Crane America. Made friends? I'm just trying to save you some money. My job is not just entertain but to put days like today into context. So call me 1-800-743- CNBC tweet me at Jim Cramer. So Palantir fails to rally in response to a great quarter and we all decide that it's time to jump ship because the entire stock market must be overvalued. Silly as it sounds, I think that actually is what drove today's action with The Dow slipping 251 points, S&P losing 1.17%. Sell, sell, sell. And Nasdaq Palantir's Home tumbling 2.04%. Do you mind if we are a little less emotional and a little more clinical here in Cray America? For a while now I've been telling you that we have three separate markets. There's the high growth high tech market. That's mostly about the data center. There's the real economy and then there's the speculative market. Let's take them one by one. The tech slash data center economy covers a lot of different areas. The companies that lead this group are at the heart of the fourth industrial revolution. Think everything from the Magnificent seven to highly valued enterprise software companies to industrial companies that have pivoted to building out AI infrastructure, the data center. These stocks tend to have high price to earnings multiples, with the multiple being what investors are willing to collectively pay for their earnings. And the average stock in The S&P 500 currently trades at 23 times next year's earnings. These datacenter stocks tend to trade at a premium to that level. Amazon sells for 32 times next year's earnings. Apple and Microsoft at around 33 times. Nvidia is around 30 times next year's numbers. All right around there. To name a few of the companies with stocks that are more expensive than the average company. S&P 500. But remember, some stocks deserve to get a higher premium. Come on. Companies aren't equal. Some are better than others. The ones I just mentioned are better than others. Now if these companies keep growing faster than expected, then we might look back and realize that they were cheap in retrospect. And that's what happens when you beat the estimates. And I lay all this out in how to Make Money in Any Market with regard to in video as the stock of Nvidia always looks expensive on the earnings estimates. But then they beat those estimates, they clobber those estimates. And we all realize that the stock turned out to be much more of a bargain than we thought time and again. Then there's the regular economy that all of us are familiar with. These are the companies that make things and do stuff. For the most part, they've been left behind because of worries about a weak consumer and higher interest rates. Some of that's because consumers are pushing back a few years of elevated inflation. Some of it's because roughly a million government employees aren't being paid thanks to the stupid shutdown. And then there's the third group, the speculative stocks. Now we struggle to value these stocks because they can make insane moves higher, something we've seen a lot lately. And then they implode for no real reason, like we saw today. These are the stocks that are most perilous stone in a correction like it looks like we're having. The money gets lost very quickly in this third cohort. Now, occasionally you get a stock that fits into two of these buckets. Aerospace, for example, is both high growth and a part of the regular economy. You're not going to get a more robust industry than aerospace. And the price earnings Multiples reflect that there's real technology that gets put into an airplane. Doesn't just manifest itself in terms of hardware or software though. Speaking of aerospace, we're going up to Harvard Business School tomorrow to interview Larry Culp, the head of GE Aerospace, who's done a remarkable job restoring the luster of that great company. Larry was a professor at hbs. Boy took the GE job. The most intriguing part of the stock market though is at the intersection between the highest growth stocks and the speculative stocks. The third bucket, Tesla comes to mind. We know it as a car company. Nothing all that speculative there. But it's also a play on robotics and self driving, two of the most cutting edge technologies out there. Tesla square in the first camp in the third one. That's the magic of Elon Musk. But you know what? No stock in the entire world epitomizes the straddle between the first world technology and the third world of speculation. More than Palantir, which reported earnings last night only have a seed stock plunge almost 8% today. It was a truly bruising session, but after a magnificent run, Palantir, the company defies easy description. It's a consulting company helping all sorts of businesses improve their bottom lines. It's an accelerant turbocharging a company's transformation from analog to digital or from one form of storage and data retrieval to another. It's a pattern recognizer, taking all of your data from different silos and identifying patterns that can help drive better decision making. It's a defense contractor, specializes in making the Pentagon more lethal. It's an inventor. Palantir played a huge role in operation warp speed that gave us Covid vaccines. It's an incredibly lucrative, amazingly fast growing businesses measured by gross margins, which are huge, and the revenue growth, which is insanely fast. Mind you, this is an objective standard when we are trying to value fast growing tech companies. Wall street professionals use something called the rule of 40. You add the company's profit margin to its revenue growth and if the sum is north of 4004o, then you've got something that's worth owning. Lots of times you'll see companies with very high growth and very low profit margins, but when they're added together, they still come out north of 40, making them acceptable to the average growth investor. But Palantir. Last night Palantir reported 63% revenue growth and 51% adjusted operating margin. That is an unheard of combination, people. Magnificent. Forget the rule of 40. These guys passed the rule of 100. I've never seen anything like it. And the company's right to be really proud of these numbers. Now there is one problem though. We have to try to figure out what the heck we're supposed to pay for those numbers. How does it translate into a stock price? A profitable company has a price earnings ratio. Palantir last night was selling at well over 300 times earnings. Even higher than Tesla. That's a little nosebleed for people. Let's make things trickier. Tesla has almost $100 billion in revenue and a $1.5 trillion market cap. Palantir is merely 4 billion in revenue, yet it was valued at almost 500 billion heading into the quarter. That's right. A company of 4 billion in profitable revenues is worth 500 billion. A company with 100 billion in proper revenues is only worth 1.5 trillion. Last night, when Palantir reported, the stock looked like it could go either way. But upon further review, the market side was all too much and Palantir stock had to go lower. Alex Karp, the fiery CEO of Palantir, was miffed about the direction of the stock. Suggested the same people have been betting against him will prove to be wrong. Again, that might be, but I think it's reasonable consider that there could be nothing wrong here at all. The stock just needs to cool off in order to grow into its market capitalization. That's how I look at it. For me, the larger issue is that we're at the moment where money managers, when asked if the market's too expensive, immediately think of the high flying speculative stocks or those in the high growth artificial intelligence column. And so they warn you away from the entire asset class. That's what's happened all my career. These guys don't think of the other 334 stocks in the S&P 500 that sell for less than 23 times earnings. Those are outrageous. They're fixated on the speculative stocks, the data center plays and Palantir. Now that's both foolish and punitive. Sure, there are indeed some stocks that are visibly overvalued. And when you pull them apart, many of these valuations can be justified. Some can. I think the Magnificent Seven can be justified in the pace of the growth that's ahead of them. Same ultimately with Palantir. The ones with no earnings or big losses or no revenues. They're hard for me and I don't think I advise you to stay away from. But the bottom line, some days it's all just seems a little bit too much to investors. So when Palantir is their North Star, their totem and they see it pulling back hard on a perfect quarter. It calls the whole market into question for them and it triggers a raft of selling. That's exactly what happened today. Don't believe the Uber bears but accept that after a run like we've had, some people are going to sell stocks you, you own, there's that you actually own. But that's because they don't want to give up the gain or because they simply can't handle the house of pain. The pain. Let's go to Rick in Wisconsin. Rick.