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Palantir Technologies (PLTR) raised its revenue guidance on August 5 with its Q2 results. In addition, the intelligence software platform company expects strong free cash flow (FCF) this year. As a result, PLTR stock looks cheap here.
PLTR is at $27.32 per share in midday on Tuesday, Aug. 6, up over 13% after its recent earnings announcement yesterday.
Palantir reiterated that it still expects to make between $800 million and $1 billion in free cash flow this year. That works out to a potential FCF margins of between 29% and 36.3%. This is based on the company's revenue projection of between $2.742 billion and $2.75 billion this year (i.e., $800m/$2.742b = 29%, and $1b/$2.75b = 36.3%).
These are very high FCF margins and imply that PLTR stock could be significantly undervalued here. This article will explain why.
Why PLTR Stock Looks Cheap
For example, analysts have recently raised their revenue projections for next year. I discussed this in my last article on July 16, “Palantir Stock Still Looks Undervalued Despite Its Recent Run-Up.” At the time, analysts had been projecting $3.25 billion in sales for 2025, but now their average revenue forecast is $3.31 billion.
Therefore, assuming Palantir generates an average of 33% FCF margins it could make at least $1.09 billion in free cash flow next year.
As a result, Palantir stock could be undervalued. For example, assuming the market values this FCF with a 1.50% FCF yield, its market cap could rise to $72.7 billion. That is over 20% higher than its existing $60.3 billion market cap.
In other words, PLTR could be worth 20.6% more at $32.94 per share (i.e., $27.32 x 1.206).
Moreover, selling short out-of-the-money (OTM) put options is a good way to play this, especially for existing investors.
Shorting OTM Puts in PLTR Stock
I discussed this in my last Barchart article on July 16. The $24.50 strike price put option expiring on Aug 9, 24 days from then, was trading for 51 cents. That provided an immediate yield of 2.08% (i.e., $0.51/$24.50) for a strike price over 14% below the price at the time ($28.50).
That trade has worked out well, despite the stock's volatility. It is now trading for just 9 cents, so the short seller has made money. It might make sense to roll this trade over to another period.
For example, the Aug. 30 expiration period shows that the $25.00 strike price put option, which is over 8% below today's price, has a premium of 66 cents. That means that a short seller can make an immediate yield of 2.64% (i.e., $0.66/$25.00).
For more risk-averse investors, the $24.00 put strike price has a 44 cents premium or a yield of 1.833%, but it is 12% below today's price.
This is especially profitable for existing shareholders who get to keep the income generated and also any potential upside in the stock above $24.00 or $25.00. Even if it falls to these strike prices, their only obligation is to buy more shares at those levels.
And given our projection that PLTR stock looks undervalued here given the company's strong FCF and FCF margins, that may be a good buy for long-term investors. The bottom line here is that PLTR stock looks undervalued here and one way to play this is to sell short out-of-the-money put options in near-term expiry periods.
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.
