Palantir Technologies (PLTR), the intelligence software company, produced its 5th consecutive quarter of GAAP profits in Q4 2023. Its adjusted free cash flow (FCF) rose to $731 million. Its 2023 FCF represented 33% of sales, which is a very high FCF margin. Moreover, and its Q4 adj. FCF of $304.8 million was even higher, at 50% of $608.35 million in sales. That was up from 25% last quarter.
As a result, PLTR stock skyrocketed to $24.38, up 45.8% from the prior price on Feb. 5 of $16.72. However, PLTR stock could be worth up to 25% more. That would raise its market value from $53.3 billion to $67 billion or $30 p/sh.
In addition, given that Palantir does not pay a dividend, existing investors can short out-of-the-money puts to create extra income.
Powerful FCF and Margins
Last month I previewed Palantir’s powerful free cash flow and suggested it could move substantially higher. I wrote on Jan. 15 in Barchart, “Palantir Is Down, But Its FCF Could Make It Worth 21% More at $20 Per Share.”
Little did I know that Palantir Technologies would power its FCF margins to 50% in Q4. This has huge implications for forward free cash flow projections. Keep in mind that this means that roughly half of every sales dollar incurs no cash costs, not even capex costs or even working capital requirements. It means that half of sales is “free” to be spent on dividends, buybacks, or just accumulate in its checking account.
It also implies that the projected FCF could be much higher. For example, analysts project revenue this year could reach $2.67 billion and $3.22 billion next year. That implies that on average its run-rate revenue will be almost $3 billion (i.e., $2.945 billion).
So sometime in the next 12 months (NTM), analysts could end up projecting $1 billion in free cash flow (i.e., $2.945b x 34%=$1 billion). Keep in mind that assumes that the company’s FCF margins stay at 34%. The company guided that adj. FCF could come in between $800 million to $1 billion in its outlook.
This will likely push analysts and the market to raise their assessment of PLTR stock’s value.
Price Targets Higher
For example, let’s assume that Palantir would theoretically pay out all its FCF as a dividend this year. The market would likely give the stock at least a 1.5% dividend yield.
It could even be lower at 1.0%. For example, Meta Platform just announced its first-ever dividend, and now META stock has a 0.43% dividend yield.
So, if we divide the forecast of $1 billion in NTM FCF by 1.5% we get a projected market cap of $66.67 billion. That is 25% over Palantir’s market value today of $53.33 billion at $24.38 per share.
Therefore, PLTR could be worth up to $30.48 per share (i.e., 1.25 x $24.38). It may take some time for the stock to reach that level, but that is what it could be worth.
In the meantime, existing shareholders can gain extra income by shorting out-of-the-money (OTM) put options. Here is how that works.
Shorting OTM Puts for Income
For example, look at the March 1 options expiration period, which is three weeks away. It shows that the $23.00 strike price put options trade for 65 cents, which is a very high premium worth shorting.
PLTR Puts expiring March 1 – Barchart – As of Feb. 9, 2024
For example, an investor who secures $2300 with their brokerage firm can short this put and receive $65 immediately. Or they can short 10 puts after securing $23,000 and receive $630. That represents an immediate yield of 2.826% (i.e., $630/$23,000).
Moreover, the stock would have to fall below $22.35 (i.e., $23.00-$0.65) on or before March 1 before the investor would have an unrealized loss on this trade. That represents downside protection of 8.326% (i.e., $22.35/$24.38 -1). So, this trade looks to be a good way to make extra income for existing investors.
Moreover, even if PLTR falls to this level, it means that shareholders can buy more shares at a good price. That is, given our assessment that it will be worth $30 in the future, buying more shares at $23.00 would be a bargain.
The bottom line is that PLTR stock looks very valuable even at today’s higher price. By shorting OTM puts shareholders can gain extra income while they wait for this to happen.
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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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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