/Technology%20abstract%20by%20TU%20IS%20via%20iStock.jpg)
Palantir Technologies (PLTR) stock has climbed over most analysts' price targets. What should investors do now? One way to play this is to sell short out-of-the-money (OTM) put and call options in nearby expiry periods.
PLTR is at $31.48 as of Friday, Aug. 30, up over 30% in the last month from its low of $24.09 on Aug. 5. That puts it well over the average analyst price target of $25.69 as surveyed by Yahoo! Finance and the mean analyst target of $24.44 as reported by Barchart.
Moreover, the AnaChart.com survey, a site that meticulously tracks analysts' reports, has a $30.27 target from 15 analysts who've written recently on PLTR stock. In fact, only one analyst tracked by AnaChart has a price target higher than today's price. That can be seen in the table below.
Dan Ives of Wedbush recently raised his target price to $35. The next closest highest price target is from Brian Gesuale of Raymond James who raised his target to $30 some 26 days ago.
So what should investors do that already own the stock? Should they sell now or hold on, even if PLTR could falter?
Why Investors Should Persist
Fundamentally the company's outlook looks sound. For example, analysts are still projecting higher revenue next year. For example, Seeking Alpha shows that the average analyst revenue forecast for 2025 is $3.33 billion, over 20% higher than this year's prediction of $2.76 billion.
Its profitability is also on track. Last quarter Palantir delivered an adjusted free cash flow (FCF) of $149 million, or 21.9% of its $678.1 million in revenue.
Moreover, the company said in its Aug. 5 press release that it continues to expect between $800 million and $1 billion in adj. FCF for 2024. That implies a full-year FCF margin of up to 36.2% (i.e., $1b/$2.76b), and 32.6% on average (i.e., $900m/$2,760m).
That implies that next year Palantir's adj. FCF could reach $1.094 billion (i.e., 33.3% x $3.33 billion in revenue).
As a result, PLTR stock may be still undervalued. For example, right now the market cap is $70.5 billion. So, that makes its FCF yield at 1.4% using an estimate of $1 billion in adj. FCF (i.e., $1b/$70.5b = 0.014).
Therefore, to be conservative, let's use a slightly higher FCF yield (1.5%) and apply that to the 2025 FCF forecast. This results in a market cap estimate of $72.93 billion (i.e., $1.094/$0.015 = $72.93b. That is 3.45% over today's price.
In other words, using this method PLTR stock could be worth 3.5% more, or $32.58 per share (i.e., 1.035 x $31.48). That is not much but it means that investors should hold on.
Shorting OTM Puts and Calls
One way to play this is to sell short out-of-the-money (OTM) puts and calls. That way they can generate income, as PLTR stock does not have a dividend. It allows investors to be paid to wait for the stock to rise to its long-term value.
For example, look at the one-month out expiry period, Oct. 4. It shows that the $34.00 call options, which are 8% over today's price, have a premium of 75 cents. That represents a covered call yield of 2.38% over the next month for existing investors.
Moreover, if PLTR stock rises to $34.00 on or before Oct. 4, the investor will sell his shares at that price and make the 8.0% capital gain. That provides a potential upside of over 10% (i.e., 8% capital gain + 2.38 % income, of 10.38% total.
Another way to play this that won't require an investor to sell his shares if PLTR rises is to sell short OTM puts. For example, the Oct. 4 expiration shows that the $29.00 strike price put options have a premium of 71 cents. That strike price is almost 8% below the spot price (i.e., 7.88% OTM), just like the call price distance.
This means the investor who secures $2,900 with their brokerage firm can earn $71 (i.e., $0.71 x 100) per put contract sold short. That works out to a put yield of 2.448% (i.e., $71/$2,900) for the next month.
What's more, there is no obligation to sell any PLTR shares. If PLTR falls to $29 or lower the investor's secured cash will purchase 100 shares at $29.00. That might work better for existing investors worried about generating capital gains taxes as could happen with covered call plays. Note also, that this short put yield of 2.45% is higher than the 2.38% covered call yield for approximately the same out-of-the-money (OTM) distance.
The bottom line is that PLTR stock presents opportunities for investors to create extra income by selling out-of-the-money puts and calls in nearby 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.
