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Palantir Technologies (PLTR) stock is down today after its Q1 results yesterday. However, investors can take advantage of this weakness. After all, PLTR stock has been treading water in a range for the past 3 months. It is now at the low end of that range.
PLTR stock is trading for $21.65 today, down over 14% from the prior close. This is well below the average price over the last three months of about $23.00.
That can be seen in Barchart's price chart below. It shows that PLTR stock is now well below the average trading range in the last 3 months
One way it to benefit from this trough is to short out-of-the-money (OTM) puts as a disciplined buy-in method. That entails selling put options at strike prices below today's spot price and benefiting from the immediate income.
I discussed this in my last PLTR article in Barchart on April 7, “Palantir Stock Is Treading Water - Good for Short-Put Trades That Yield 2.0% in 3 Weeks.” The article discusses a price target for PLTR stock and how to sell short OTM puts for extra income and as a buy-in method.
This play can be repeated. But first, let's review the company's recent results to see why its price target is still higher than today's price. After all, that is the real reason to short puts - to buy in in a disciplined manner to gain a lower entry price as a long-term investment.
Palantir's Strong Results in Q1
Palantir reported on May 6 that its Q1 revenue was up 21% to $634 million and net income was significantly higher at $105.5 million, its largest-ever quarterly income. That represented a 17% net income margin and its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) earned a whopping 37% margin on revenue.
However, its adjusted free cash flow (FCF), although strong, had a lower FCF margin than last quarter. That could be one major reason why the market has been disappointed in Palantir's results and the stock is lower.
For example, it generated $148.6 million in adj. FCF, which represented 23.4% of its $634 million in revenue during the quarter. That was significantly lower than the 50% FCF margin it generated in Q4, as I pointed out in a recent GuruFocus article.
Nevertheless, for the trailing 12 months (TTM) ending Q1, Palantir has generated $641.4 million in FCF, according to data from Seeking Alpha, on $2.334 billion in revenue. That represents TTM FCF margin of 27.5%.
This FCF margin is lower than the 33% TTM margin it made last quarter (i.e., 2023 results), but not as far away as the 50% FCF margin it made in Q4. In other words, the company's FCF margins are volatile, but not as much as the market may think.
Forecasts for Higher Target Prices
Moreover, management continues to forecast significant revenue growth and raised their forecast to a range of $2.677 billion to $2.689 billion. Sell-side analysts are projecting $2.7 billion in revenue this year, which would be 21% more than last year's $2.23 in sales. And for 2025, they project $3.24 billion in revenue.
The point is that the company is still on a good growth trajectory. For example, on a next 12-month (NTM) run rate basis, this works out to an average revenue of almost $3 billion ($2.972 billion)
As a result, we can assume that Palantir could generate a 30% FCF margin on $3 billion in sales, or $900 million in adj. free cash flow. That would be 23% higher than the $730.5 million in FCF it generated in 2023.
Therefore, using a 1.5% FCF yield valuation metric, the market cap could rise to $60 billion (i.e., $900m/0.015) from its existing $48.2 billion market value. That represents a 24.5% potential rise in the price to $31.39 per share (i.e., 24.5% over its price yesterday of $25.51 when it had a $48 billion market cap). Even using a 24% higher price than today sets its price target at $27.00 per share.
Given the upside in the stock, this makes it ideal to sell short OTM puts to set a lower buy-in price.
Selling PLTR Puts Short for Income and as a Buy-In Method
For example, look at the May 31 put options expiration period, 24 days from now. It shows that the $20 strike price offers short sellers a bid side premium of 37 cents. That results in an immediate yield of 1.85% (i.e., $0.37/$20.00). Note that this strike price is well below today's price - i.e., it's 6.89% out-of-the-money.
Moreover, this is a large volume of put options at both this strike price and the $19.50 strike. This indicates that there will be strong pressure on the stock at this price near the end of the month.
As a result, this is potentially a good, disciplined method of buying into PLTR stock. That could happen if the spot price for PLTR stock falls over 6.8% to this level and the short put option play is assigned.
Here is how that works. The investor must secure $2,000 in cash and/or margin for every put contract sold short at $20.00 for expiry on May 31. Then the investor can enter an order to “Sell to Open” 1 put contract at $20.00 for expiration on May 31. Their brokerage account will immediately receive $37.00. That works out to 1.85% of the investment made.
So, for example, if the investor sells 10 puts they have to secure $20,000, but their account will receive $370.00. That makes the net breakeven at $19,630, even if the stock falls to $20 on or before May 31.
Moreover, if the investor can repeat this play just 3 times over the next quarter, they stand to make $1,110, or 5.55% of the $20,000 invested in the type of play. That is a good expected return (ER) for long-term investors.
The bottom line is the PLTR looks cheap here, and it has a higher price target. One way to play this to generate extra income and as a potentially cheap buy-in method is to sell short OTM puts.
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.
