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Palantir Technologies Inc (PLTR) stock still looks cheap here, despite its rise over the past two months since releasing its quarterly results on May 6. The reason is the company is projected to make significant free cash flow (FCF) and FCF margins over the next year.
As a result, I estimate it could still be worth as much as $35 per share, or over 22% more. This article will describe why.
PLTR is at $28.68 on Tuesday, July 12, up 39% from a recent low of $20.60 on May 10. I described the underlying value of PLTR stock in my May 28 Barchart article, “Palantir Stock Still Has Good Upside Based on Its FCF Margins - Short Put Strategies Work.”
I wrote that based on a projected 30% FCF margins and a $3 billion revenue run rate it could generate $900 million in FCF. Based on a 1.5% FCF yield valuation, PLTR stock could be worth $60 billion, or $26.92 per share.
Now that this price target has been met, I want to update my forecasts and target price in this article.
Updated FCF Estimate
Analysts now project that Palantir's revenue could rise to $3.25 billion next year, up from $2.70 billion projected for 2024. If we assume that the company will make at least a 30% FCF margin going forward, that results in a projected $975 million in FCF for 2025 (i.e., 0.30 x $3.25b = $975m).
That is significantly higher than the $900 million in FCF I used in my prior target price forecast. As a result, using a 1.25% FCF yield valuation metric implies that Palantir could end up with a market value of $78 billion (i.e., $975m/0.0125 = $78 billion).
That is 8.33% higher than my prior target. Moreover, since its market cap today is $63.85 billion, this means that PLTR stock could still be worth 22.16% more than today. That puts its price target at $35 per share (i.e., $28.68 x 1.2216 = $35.04).
Just keep in mind that this could take up to a year to happen. The market will have to settle on these revenue estimates for 2025 to value the stock. Moreover, analysts will have to incorporate 30% FCF margins in their valuation analysis for the stock.
Analysts Price Targets
Analysts are still wary of PLTR stock, especially after its recent run-up, as mentioned earlier. For example, Barchart's survey shows that the mean price target of $21.47 per share. Yahoo! Finance's survey has a similar average price target of $21.69 per share.
Part of the reason for this could be that the company experienced lower FCF and FCF margins in its latest quarter than in the prior quarter. Palantir's Q1 FCF margin fell from 50% in Q4 2023 to 23.4% in Q1.
However, its orders from its main customers like government agencies are seasonal as subscription renewals occur once a year. As a result, over the trailing 12 months (TTM), Palantir's FCF margins were 27.5%. This was down from the 33% TTM FCF margin in Q4.
But I suspect over the next 12 months its margins will rise to 30% or even higher. If that turns out to be the case analysts will review their targets significantly. The market is already doing this, accounting for the run-up in the stock price.
Moreover, AnaChart.com, a new sell-side analyst tracking service, shows that some analysts are already doing this. AnaChart estimates that 15 analysts who have recently written about PLTR stock have a $28.58 average price target.
The bottom line is that analysts will likely revise their price targets, especially if the company's upcoming quarterly earnings show progress in terms of its FCF margins.
Shorting OTM Puts
One way to play this is to sell short out-of-the-money (OTM) put options in nearby strike prices. This is because the stock's recent run-up has also pushed up put option premiums. That is because traders believe the stock will take a hit. This could repeat what happened last quarter. The upcoming quarterly earnings release is expected around Aug. 5.
For example, look at the Aug. 9 expiration period, 24 days from now and after the earnings release date. The $28.00 strike price put option has a premium of $1.70. This represents a potential yield of 6.07% to the short seller. Note that this strike price is just 2.3% below today's price.
But it also implies that many buyers of these puts expect to see PLTR stock below $26.30 (i.e., $28-$1.70) by Aug. 9.
So the trick for short sellers here is to choose deep out-of-the-money (OTM) strike prices. That way they gain extra income but can also set a potential buy-in target price.
The table above shows that the $24.50 strike price, which is over 14.5% below today's price, still has a $0.51 premium. That represents a 2.0% yield (i.e., $0.51/$24.50 = 2.08%) for a period of less than one month to the short seller of these puts.
Here is what that means. The investor first secures $2,450 for every put option contract they want to short. For example, to short 5 put contracts, the investor gives $12,250 in cash and/or margin to their brokerage firm to secure the potential purchase of 500 shares at $24.50 in case the stock falls to $24.50 or lower on or before Aug. 9.
Then, the account will immediately receive $255 (i.e., 5 x 100 x $0.51). That represents 2.08% of the $12,250 invested in this play. Moreover, even if the stock falls to $24.50, the investor's net buy-in is just $11,995 for 500 shares, or $23.99. That provides significant downside protection from here.
That is an easy and relatively safe way to set a buy-in target price using short puts to purchase PLTR stock. Moreover, for existing investors, especially those willing to take on more risk, this is a way to gain extra income.
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.
