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Palantir Technologies (PLTR) reported strong Q3 revenue growth on Nov. 2 along with a huge rise in its free cash flow and FCF margins. This helps raise analysts' target prices and increases the underlying value of PLTR stock.
The intelligence software and services company said its revenue rose 17% YoY to $558 million. This was stronger than its Q2 sales gain of just 13%.
Moreover, most of this gain came from its commercial division, about 45% of total sales, which rose 25%. At this pace, corporate revenue will soon be Palantir's largest segment.
Moreover, its adjusted free cash flow (FCF) rose to $141 million. That is up from $96 million in the prior quarter. More importantly, its FCF margin now represents a healthy 25% of sales. That is up from an 18% FCF margin last quarter.
In other words, the company's revenue and cash profits are not only strong and growing, but their growth is accelerating. That is helping to push PLTR stock higher today to $18.59, up over 3.4%.
FCF Could Push Its Underlying Value Higher
Analysts forecast that revenue could hit $2.22 billion this year and rise by 18.5% to $2.63 billion in 2024. That implies, using a 25% FCF margin, its free cash flow could be in the range of $555 million to $658 million over the next 12 months.
That averages out to over $600 million in FCF over the next year.
Moreover, it could be even higher, assuming its FCF margin continues to rise. For example, if we assume FCF margins average about 27%, free cash flow could be in the range of $600 million to $710 million, or $655 million.
We can use that to establish a target price. For example, using a 1.5% FCF yield, PLTR stock will be worth $43.7 billion. This is seen by dividing the $655 million FCF forecast by 1.5%. This is also the same as multiplying it by 66.7x.
Price Targets for PLTR Stock Based on FCF Estimates
Granted that is a high valuation, and it implies that the stock could rise by 12.9% since its market cap today is $38.7 billion. This high valuation relates to the huge growth rates forecast for the company. In other words, PLTR could potentially be worth at least $21.00 over the next year.
What is the upper range of its upside? If Palantir eventually makes a 35% FCF margin by the fourth quarter of 2024, its run-rate free cash flow by then would be over $1 billion. This assumes revenue hits $3 billion by 2025.
That means that at today's market cap of $38.7 billion, its FCF multiple is only 38x. And using a 50x multiple (i.e., a 2% FCF yield), its valuation could rise to $50 billion. That implies a gain of 29% in its market cap and its price target would be $24.00 per share.
Shorting OTM Puts for Income
Palantir does not yet pay a dividend. One way to create income if you are a shareholder is to sell short out-of-the-money (OTM) put options in near-term expiration periods.
For example, look at the put option chain that expires on Nov. 24, which is 3 weeks from today. It shows that the $17.00 put strike price, which is 8.87% below today's spot price, has a bid price of 33 cents.
That implies that short sellers of these put options can immediately make 2.12% (i.e., $0.33/$17.00). If this is done every 3 weeks for a year, i.e., 17x in the next 12 months, the annualized expected return is a whopping 36%.
That is a very good expected return. Moreover, there is plenty of downside protection in case PLTR stock falls over the next 3 weeks.
The bottom line is that investors can expect to see PLTR stock worth more over the next year. One way to play this is to sell short OTM puts while also holding PLT stock. That allows investors to make income while they wait for the stock to rise.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
