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Today a large volume of out-of-the-money (OTM) call options for Palantir Technologies (PLTR) stock has traded in a near-term expiry period. This highlights the underlying value of this AI and software security company.
PLTR stock is trading today at $21.39, down over 19% from its peak of $26.46 on March 7. In effect, this presents a good opportunity for value investors to buy the pullback in this extremely profitable and high free cash flow (FCF) generating company's stock.
Today's Barchart Unusual Stock Options Activity Report shows that almost 7,000 call option contracts expiring May 17 have traded. The strike price is $26.50, 23.9% over today's price. That means whoever bought these calls is very optimistic about the near-term outlook for PLTR stock.
Moreover, the premium at the mid-price is only 41 cents or just 0.15% of the call strike price. That means that short-sellers are not making much money on this trade. I suspect, therefore, that the initiating trade came from long buyers of the calls.
Why PLTR Stock Looks Cheap
I highlighted the underlying value of this software intelligence company in a recent GuruFocus article, “Palantir Technologies Looks Deeply Undervalued.” You can read that article to get a deeper look at why I think the stock is undervalued
For example, in Palantir's Q4 2023 earnings report on Feb 5, it reported 20% year-over-year sales growth. In addition, its free cash flow (FCF) margins (i.e., FCF/revenue) in the fourth quarter were 50% and 33% for all of 2023.
More importantly, the company said it is now all-in on integrating AI into its product line. Moreover, Palantir is so confident about its finances that it projected its adj. FCF will be between $800 million and $1 billion this year.
I suspect it will be much higher than this. Nevertheless, my price target, using a $1 billion adj. FCF forecast is that it could be worth at least $30.71 per share and as much as $45.50 on the upper end.
Why This Makes These Calls Worth Buying
Moreover, these call options may be of interest to near-term buyers as the company is set to report its Q1 earnings on May 6. That is well before the expiration period end (May 17) of these out-of-the-money call options.
The investors in these calls do not necessarily have to hope that the stock will rise to $26.50 by then. If the earnings are perceived as excellent, the extrinsic value of the options could likely push their price well over 41 cents where they trade today.
Keep in mind that the downside risk is substantial. For example, the intrinsic value of any out-of-the-money (OTM) call option like this is zero. That is because unless the stock rises to $26.50 or higher on or before the close on May 17, the calls have no intrinsic value.
So, investors in these calls are essentially taking a speculative position, akin to gambling, and highly dependent on the sentiment related to the outlook for the company. The bottom line is that PLTR stock looks undervalued here. But it could take much longer than the expiration period of these calls before the stock rises to my target price range shown above.
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.
