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Palantir Technologies (PLTR) stock got the week off to a good start Monday, gaining over 6% on the day and, in the process, moving into the 17th spot in Barchart’s Top 100 Stocks to Buy, inside the top 20.
Although PLTR stock is up nearly 28% in 2025 and 295% over the past 12 months, it hasn’t been without significant volatility. For example, in mid-February, it hit a 52-week high of $125.41, but in less than a month, it was trading in the $70s. However, from March 2024 to the end of last year, it could do no wrong.
As it regains momentum, up 27% since March 10, investors appear more comfortable betting on Palantir continuing its ride back to the $120s.
I’ve been bullish about Palantir for a while. In November 2022, I suggested aggressive investors might want to check out the beaten-down tech stock. It’s come a long way since.
Palantir was an intriguing bet that appeared to be very close to bottoming. In hindsight, I was a month off, but I was very close. It’s up 12-fold in the 40 months since.
For an encore, I will explain why betting on Palantir is a good move for these same aggressive investors and the options to play to do so.
How’s the Valuation?
Barchart contributor Omar Ibne Ehsan discussed this subject yesterday, wondering if $18 or $125 was more likely for PLTR stock in 2025. Good question. My first instinct is to go with the latter price, but first, I must consider if its recent momentum is a head fake or the real deal.
My colleague argues it “trades above 728 times trailing earnings and over 71.5 times sales,” which puts it in nosebleed valuation territory. Still, it doesn’t necessarily suggest that it’s ready for fall into the high teens over the next nine months.
One area to consider in its current valuation is free cash flow.
When I wrote about Palantir in late 2022, it delivered Q3 2022 adjusted free cash flow (AFCF) of $37 million, its eighth consecutive quarter of positive AFCF. Further, its trailing 12-month AFCF was $231 million or 13% of revenue.
Where is it today?
Palantir reported Q4 2024 results in early February. They were better-than-expected, driving the shares 22% higher on the news. The AFCF in the fourth quarter was $517 million, 70% higher than Q4 2023, with a 63% margin, 13 percentage points higher than a year earlier. Its AFCF was $1.25 billion for the year, 71% higher than a year ago, with a 44% margin, 11 percentage points higher year over year, and 3.4 times higher than in 2022.
So, yes, it’s come a long way and appears to be just getting started.
Based on these figures, I’ll figure out the difference in valuations between November 2022 and March 2025.
As of Sept. 30, 2022, it had 2.08 billion shares outstanding and a market cap of $16.91 billion for a price-to-AFCF ratio of 73.2. As of March 25, it has 2.35 billion shares outstanding, a market cap of $226.91 billion, and a P/AFCF ratio of 181.5.
So, the P/AFCF ratio is about 2.5 times higher today than three years ago, while the AFCF has increased by 5.4 times over the same period.
As my colleague stated, unless the AI narrative completely blows up, which is unlikely, it’s hard to argue that Palantir doesn’t deserve multiple expansions given the free cash flow generation over the past three years and also what’s to come.
I could be wrong, but I see PLTR stock’s actual value closer to $125 or higher than anywhere near $18.
So What’s the Play for Aggressive Investors
When I discuss unusual options activity on Thursdays and Fridays, I’m quick to point out that I’m a relative newbie when it comes to options despite the fact I’ve been writing about them for three years now.
A few months ago, I devised an excellent new options strategy to generate income while seeking out better entry points and buying stocks I’m bullish about, like Palantir.
It involves three steps: 1) Buy the stock at current prices, 2) Sell an OTM (out of the money) call, which is a covered call, and 3) Sell a cash-secured put OTM. Both the call and the put have the same expiration date.
Now, it turns out that it wasn’t an original idea. There is a name for it: Covered Strangle. Here’s what Fidelity has to say about it.
“Choosing the covered strangle strategy based on a modestly bullish forecast requires both a high tolerance for risk and trading discipline,” states its website.
“High tolerance for risk is required, because risk is leveraged on the downside. Trading discipline is required because the ability to ‘cut losses short’ is an attribute of trading discipline. Many traders who use the covered strangle strategy have strict guidelines – which they adhere to – about closing positions when the market goes against the forecast.”
Now that I have a name for it and know it’s only for aggressive investors, here’s what the Palantir play might be.
First, you buy 100 shares at current prices. Sure, it’s elevated, but you’re bullish about its prospects or shouldn’t be doing this. So, yesterday’s close was $96.75, an outlay of $9,675.
Second, I’m looking for a put strike around 20% lower and expiring in 30 days or so and a call strike around 50% higher than currently. That’s around $145 on the upside and $77 on the downside.
Unfortunately, the closest I can get on the upside with any volume is the $130 call. Expiring in 32 days on April 25, the bid price is $0.44, an annualized return of 15.2% [$0.44 / $96.75 * 365 / 32].
On the downside, the $77 put works well. It provides an annualized return of 13.7%. The overall annualized return would be 18.3% [$1.59 / $96.75 * 365 / 32].
Your maximum profit would be $130 call strike price - $96.75 purchase price + $1.59 premium, which equals $34.84,
Your maximum loss would be $96.75 purchase price + $77 put strike price - $1.59 premium, which equals $172.16. Theoretically, your maximum loss would be if the stock falls to $0. Still, given Palantir’s financial situation and only 32 days to expiration, the odds are likely up there with getting hit by lightning.
Because you are bullish about Palantir in the long term, buying another 100 shares at $77 would give you an even better entry point, lowering your average cost. But it’s important to remember that you should have the cash in your account to cover the buy if assigned.
Do not try this if you are at all risk-averse.
