Palantir’s Stock: Potential 20% Upside?

Palantir Stock

Palantir (NYSE:PLTR) stock is deemed undervalued, with potential for a 20% increase, driven by robust free cash flow. The company’s Q3 results showcased a 17% YoY revenue rise to $558 million, accompanied by an adjusted free cash flow of $141 million, equating to a 25% margin on revenue. Analysts project next year’s revenue could reach $2.66 billion, potentially pushing Palantir’s stock higher.

Assuming a margin increase of 27%, the adjusted free cash flow projection reaches $718 million, prompting a high market valuation. Even with a conservative 1.5% yield, the valuation would be $47.88 billion, indicating a potential 19.7% increase from the current market cap of $40.88 billion. This optimistic outlook sets a target price of over $22.00 per share, representing a 20% rise.

While analysts express doubts, averaging a price target of $15.43 per share, conflicting reports from a new analyst tracking service, AnaChart, suggest a potential upside. AnaChart reports an average of 14 analysts’ price targets at $0.83 over the prior price of $20.27, indicating some disagreement on the negativity surrounding the stock.

Investors adopting a free cash flow approach for setting price targets may need patience for the outlined target to materialize. To make this wait profitable, a strategy involves selling short out-of-the-money (OTM) near-term expiration options for income.

For instance, analyzing put options expiring on Dec. 29, 25 days away, reveals the $17.00 strike price, over 11% below the current stock price, with a premium of 33 cents, yielding 1.94%. Alternatively, the $17.50 strike price offers a 2.57% immediate yield with a 45-cent premium, showcasing a strategy for investors to generate income while anticipating PLTR’s rise.

Despite potential unrealized losses if the stock falls, investors employing this strategy can hold onto their shares, waiting for Palantir to recover. Furthermore, this approach can be repeated every 25 days, translating to an annualized expected return of over 27% for the $17.00 strike price and 36% for the $17.50 strike price.

While yields may vary, the current trade presents a profitable long-term opportunity, demonstrating its worth for existing shareholders while they await the target price.

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