Palantir’s Robust FCF Signals a Potential 21% Upside at $20 per Share

Palantir Stock

Palantir Technologies (NYSE:PLTR) has witnessed a decline from its recent peak of $21.26 per share to $16.76 in Monday’s morning trading on January 15, 2024. Despite this dip, the company’s formidable free cash flow (FCF) suggests the potential for PLTR stock to surge by over 21% to its previous peak. An intriguing approach for investors to capitalize on this is by considering shorting out-of-the-money (OTM) puts.

Unlocking Value through Free Cash Flow

In the third quarter, Palantir generated an adjusted free cash flow of $141 million, reflecting a robust 25% margin on quarterly revenue totaling $558 million, a 17% YoY increase. This impressive FCF performance allows us to extrapolate ongoing free cash flow projections.

Analysts, as per Seeking Alpha, anticipate 2024 revenue to reach $2.66 billion. Applying a 25% margin to this estimate yields a projected 2024 FCF of $665 million. Assuming a market-standard 1.5% FCF metric, the resulting market capitalization would ascend to $44.33 billion – an increase of 21.6% from its current $36.47 billion. In essence, PLTR stock is potentially valued at 21.6% more than its January 12 price, equating to $20.38 per share.

Generating Pseudo-Income through Shorting OTM Puts

While Palantir currently does not distribute dividends from its FCF, investors can create pseudo income by employing strategies like shorting OTM puts and generating yield while awaiting the stock to reach its target price.

Shorting OTM puts involves selling puts at strike prices below the current spot price, allowing shareholders to generate income without the concern of having their shares called or exercised. For instance, examining the options expiring on February 2, 2024, reveals that the $15.50 strike price puts, positioned 7.5% below the current price, trade for 24 cents.

Investors can short these puts by securing $1,550 in cash and/or margin with their brokerage firm. This amount allows for the potential purchase of 100 shares at $15.50 if the put contract is exercised. By selling to open 1 put contract at the $15.50 strike price, the investor immediately receives $24, translating to an immediate 1.55% yield.

If this trade is repeated every three weeks for a year, the expected return is $4,080 (17 periods x $240). On an annualized basis, this represents a noteworthy 26.3% expected return, assuming no obligation to buy the stock at any point.

In conclusion, the potential upside of PLTR stock at its current price, coupled with its robust FCF, indicates that investors might witness a resurgence to its previous peak. A strategic approach to navigate this period could involve shorting OTM puts in nearby expiration periods, as outlined above.

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