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Palantir Inc. (PLTR) stock hit a new high on Friday, after its "eviscerating" results on Feb. 3. As a result, analysts keep hiking their price targets, but can't keep up with PLTR's rise. With high yields, shorting out-of-the-money put options is a good play.
PLTR hit $119.16 on Friday, Feb. 15, up +42% since releasing its results on Feb. 3 ($83.74), and even +$14.8% the day after on Feb. 4 when it closed at $103.83.
Can anything stop this stock? And what should investors do if they don't already own it? This article will address these issues.
Accelerating FCF Growth and Margins
I discussed Palantir's astounding results in my Feb 4 Barchart article, "Palantir's "Eviscerating" Q4 Results (their words!) - PLTR Stock Skyrockets 25%."
Palantir's revenue rose +36% year-over-year (Y/Y), even higher than its 30% Y/Y rise in Q3. This shows that its top-line growth is accelerating, not slowing down.
More importantly, its adj. free cash flow (FCF), which is all its cash generated even after capex spending and all cash operating expenses (including net changes in working capital), rose +69.8% Y/Y:
$517.4 billion Q4 2024 / $304.75 billion Q4 2023 = 1.6977 = +69.8% Y/Y for adj. FCF
In other words, even though revenue was up +36% Y/Y :
$ 827.5 billion revenue Q4 2024 / $608.35 billion Q3 2023 = 1.36 = +36% Y/Y revenue growth
its FCF was almost twice that increase (+69.8% / +36.0% = 1.939).
This is what happens when a company is experiencing operating leverage. The higher revenue grows, the faster or accelerating its FCF grows.
As a result, its FCF margins will continue to expand. That means its cash profits as a percent of revenue will rise.
For example, look at the table below:
This shows how the company's adj. FCF margins have risen in the past year and even since Q3 2024. In the last quarter, they rose from 60% of sales to 63%.
This bodes very well for the company's price targets.
Price Target Using FCF Margin and FCF Yield
We can set a new price target assuming that the company's adj. FCF margins keep rising. That seems highly likely given Palantir's operating leverage.
For example, analysts now expect to sales rise to $3.78 billion this year, up +31.9% from 2024's $2.8655 billion in revenue. Moreover, by 2026 year-end, they are projecting $4.76 billion in sales.
So, on average for the next 12 months (NTM), its run rate revenue is $4.27 billion. That is 49% higher than in 2024. As a result, we can expect that its adj. FCF may rise to 55% from 44% in 2024, as it rose 1100 basis points last year:
$4.27 billion NTM revenue x 0.55 adj FCF margin = $2.3485 billion NTM adj. FCF
That is 88% higher than the $1.249 billion in adj. FCF in 2024 (see table above).
This could be the main reason why PLTR keeps rising. For example, let's assume that the market values PLTR at an FCF yield of 0.75% (even though its historical FCF yield today is less than 0.50% (i.e., $1.249b / $271.5 billion):
$2.3485 billion NTM adj FCF / 0.0075 = $313.13 billion market cap
That is still 15.3% higher than its market cap today of $271.5 billion. In other words, our target price using this FCF margin and FCF yield method is +15.3% higher than $119.16:
1.153 x $119.16 p/sh = $137.39 price target
This is even higher than my previous price target of $102.45 on Feb. 4. Other analysts have not kept up with PLTR stock, although they keep hiking them.
Analysts' Price Targets
Analysts have hiked their price targets as they see PLTR rising (not before). For example, two weeks ago (in my last article), Yahoo! Finance's survey showed an average of $77.94 per share from 23 analysts, but now it's at $84.69. But this is well below today's price of $119.16, just as it was below the price two weeks ago.
However, AnaChart, which tracks only analysts who have kept writing on PLTR stock, says the average today of 15 analysts is $119.84, close to today's price. Two weeks ago in my Barchart article, I reported that the average at AnaChart was $79.26.
That means many analysts have significantly raised their price targets since this last earnings report. This can be seen in the table below:
This shows that many analysts have dramatically raised their price targets from very low numbers. But they have a conundrum. The stock keeps rising well over their price targets. So, do they really understand what is going on with PLTR stock?
For example, only one analyst, Mariana Perex Mora of Bank America Merrill Lynch, has a higher price target than today's price. Her target is $125.00, up from $21.00, which she raised 11 days ago after the company's 2024 earnings were released.
Many of these analysts now accept that Palantir's adj. FCF margins will keep rising. However, relying on analysts has not worked. So, what should investors do here?
One way is to set a lower price target by selling short nearby out-of-the-money (OTM) put options, and get paid with high yields while waiting for the stock to hit that target.
Shorting OTM Puts to Set a Price Target
Look at the March 7 expiration period, three weeks from now. Many out-of-the-money (OTM) put options have huge yields, a great opportunity to set a lower buy-in target.
For example, the put option contract at the $113.00 strike price, over 5% below Friday's closing price (i.e., out-of-the-money), has a huge bid-side premium of $3.55 per put contract.
That means that a short-seller of this put option contract will earn an immediate yield of 3.14% over 3 weeks (i.e., $3.55 / $113.00 = 0.03142).
Moreover, for more risk-averse investors, the $110.00 strike price put has a bid-side premium of $2.62. That provides a short put yield of 2.38% (i.e., $2.62/$110.00 = 0.0238).
Here is what this means. An investor who secures $11,000 in cash or buying power with their brokerage firm can do this short sale. The cash secured acts as collateral to buy 100 shares of PLTR in case PLTR falls to $110.00 anytime in the next three weeks.
The investor can then enter a trading order to “Sell to Open” 1 put contract at $110.00 for expiration on March 7. The account will then immediately receive $262.00. That is why the yield on investment is 2.38% (i.e., $262/$11,000).
Moreover, even if that happens the investor's breakeven point is $110.00 - $2.62, or $107.38. That is 10% below today's price. In other words, this is a good way to set a lower buy-in price target.
It may or may not result in a short-term capital loss (if PLTR falls below $107.38 by March 7). But in any case, the investor gets to keep the income already received.
That means if the investor repeats this trade every three weeks for a quarter (i.e., 4 times), they stand to make an expected return (ER) of $1,048. That represents 9.53% of the $11,000 invested over that period. Moreover, at the $113.00 strike price, the investor could potentially make $355 every three weeks $1,420, or an ER of 12.566%.
So, you can see that given the high yields, the short-put sale trade could help an investor set a lower price target and get paid while waiting. This could be a good way for investors to play PLTR stock.
