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Palantir Technologies (PLTR) stock has been rising, well over analysts' targets. Those targets keep moving higher as well. Is PLTR stock a bargain here? One key is its free cash flow and FCF margin. These metrics could surprise the market in the next several quarters.
PLTR is at $36.52 in midday trading on Tuesday, Sept. 17. This is up over 50% in a little over a month since Aug. 5, when it closed at $24.09. What's up with that?
Trading Trends in PLTR Stock
One point to note here is that something similar happened last quarter. PLTR peaked a few weeks before the Q2 earnings release and then tanked for a month. Traders should be careful in case something similar is going to happen.
For example, earnings for Q3 are likely to be released in the first week of November. If the same trend occurs, it would not be surprising to see PLTR stock peak in early October or shortly before. That is right now.
The point is to look for PLTR stock to peak fairly soon - about a month before Q3 earnings are released on Nov. 5 or 6. Once earnings come out, no matter how good, look for PLTR stock to tank.
Price Targets for PLTR
Analysts have price targets for PLTR below its present price. This is even though they have pushing them higher. I discussed this in my last article on Sept. 2, “Palantir Stock Has Risen Over Analysts' Price Targets - What Now?”
For example, in the article, Yahoo! Finance reported that the average price target was $25.69. Today that target price is slightly higher at $26.94. But this is still $10 or so below today's price. Similarly, Barchart's mean target two weeks ago was $24.44, and today it is $25.69.
Moreover, two weeks ago, AnaChart, a more precise sell-side tracking site, said that 15 analysts had an average price target of $30.27. Today, their average is $34.74. That is much closer to today's spot price but still represents a potential 5% drop.
The bottom line here is that PLTR could be overvalued. Or is it?
Palantir's Revenue and Free Cash Flow Could Surprise Analysts
One flaw in this analysis is that Palantir could surprise analysts with significantly higher revenue and free cash flow (FCF). For example, in its Q2 earnings release the company said that it expects to see much higher revenue in Q3.
Palantir said that Q3 sales would range between $697 million and $701 million. That represents a 3.0% rise in the midpoint over Q2 revenue of $678.1 million. Moreover, analysts now expect $703.69 million in sales, or +3.8%.
However, Palantir's revenue surprised analysts in Q2 by being $25 million higher than forecasts. If that happens again, that represents a Q/Q gain of 6.93% or an annualized run rate of 30%.6% on a compounded basis.
Moreover, the company produced a 22% free cash flow margin last quarter, significantly higher than its 18% FCF margin last year. If this FCF margin rises to 25% next year, and the company makes $3.32 billion in revenue in 2025, its run rate FCF could hit $825 million (i.e., $3 billion x 0.25).
That could give PLTR stock a premium valuation. For example, using a 1.0% FCF yield, that pushes its market cap to $82.500 billion.
The problem is that is where the stock is right now. Its present market cap is $81.5 billion. In other words, the best scenario pushes the stock's value just 1.2% higher, or $37.00 per share.
How to Play This?
One way is to buy put options, assuming the stock will fall. However, put option premiums are now fairly high. Another play, as I suggested in my last article, I suggested selling covered call options - which is mainly for existing shareholders.
For example, the $40.00 call option today expiring on Oct. 11 trades for 52 cents on the bid side. That strike price is 9.6% over today's price and represents a covered call yield of about 1.50%. So the potential expected return (assuming PLTR rises to $40 in the next three weeks) is over 11%.
If you don't already own PLTR stock it might make sense to take short deep out-of-the-money (OTM) puts in short-term expiry periods. That way you can set a much lower buy-in target price and get paid while waiting.
For example, look at the Oct. 11 expiry period, about 3 weeks from now. It shows that the put options at the $32.00 strike price, 12% below today's price, trade for 28 cents per contract. That provides an immediate yield of 0.875%, just below 1% to the short-put investor (i.e., $0.28/$32.00).
Moreover, more risk-averse investors can short the $30.00 put option, 18% lower, and still receive a premium of 13 cents, or 0.43% (i.e., $0.13/$30.00). That represents a very good buy-in price target for most investors, below the average of analysts' price targets according to AnaChart.
The bottom line here is that PLTR stock seems to be at a full valuation. Nevertheless, the company is doing very well, with higher revenue and free cash flow expected over the next year. One way to play this is to sell covered calls at much higher strike prices - i.e., out-of-the-money (OTM). That works for existing investors.
Another way is to sell short significantly lower put options (i.e., also out-of-the-money) to gain extra income and also set a potentially lower buy-in price target.
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