These 2 stocks have been falling recently, but experts still consider them expensive

In recent weeks, Wall Street has been in selling mode, leading to sharp declines in some previously strong rising stocks. These include technology companies Palantir and Tesla, whose shares have seen significant losses. Shares of Palantir have fallen around 37% from their peak, while Tesla has fallen to less than half its previous value.

While these declines would seem to present an interesting buying opportunity, there are still reasons to be cautious and not invest in these stocks just yet.

Palantir's problems: high valuation and uncertainty of government contracts

One of the main reasons to be cautiouswith an investment in Palantir $PLTR is its still high valuation. Even after a significant drop, the stock is trading at a forward price-to-earnings (P/S) ratio of over 49, which is extremely high. By comparison, in recent years, software companies have been valued at about half that ratio despite showing higher growth.

Another risk factor is the uncertain future of government contracts. Palantir has historically benefited from contracts with the US government, which accounted for 42% of its total revenue last year. However, recent efforts to cut the US Department of Defense's budget by 8% may affect the amount of contracts the company receives. Although Palantir offers solutions that may increase efficiency, it is uncertain how the new budget cuts will play out.

On the other hand, if Palantir's share price falls into the lower $40s, it could become a more attractive investment. The company is showing strong growth in the commercial sector, primarily due to its artificial intelligence (AI) platform. However, at the current price level, the risk of a high valuation remains too significant.

Tesla: Waning sales and political polarization

Tesla $TSLA has been struggling with declining automotive revenues, which have fallen 6% in 2024 and as much as 8% in the most recent quarter. Car deliveries have stagnated year-over-year, and in China, the largest EV market, Tesla faces strong competition and obsolete models.

Another complicating factor is Elon Musk's political involvement. His close collaboration with the administration of former President Donald Trump and the newly created Department of Government Efficiency (DOGE) may negatively affect the perception of the Tesla brand among some customers. In a world divided by political views, Musk's involvement in politics may be seen as a deterrent to some potential buyers.

While Tesla is trying to diversify beyond electric cars - investing in autonomous driving, AI and robotics - its history is littered with unfulfilled promises. Musk claimed in 2015 that Tesla would achieve full autonomy by 2018, and in 2019 promised one million robotaxis by the end of 2020. Five years later, Tesla still doesn't have a fully autonomous system, while rival Waymo has been running robotaxis for paying customers since 2022.

With stagnant sales and plenty of speculative expectations baked into Tesla's stock price, it's better to avoid investing in the company at this point.

Disclaimer: There is a lot of inspiration to be found on Bulios, but stock selection and portfolio construction is up to you, so always do a thorough analysis of your own.

Source: Yahoo Finance