Palantir Technologies (NASDAQ:PLTR) recently announced impressive Q3 financial results, signaling a positive trend for both the company’s stock and its target price. The intelligence software and services firm reported a 17% year-over-year increase in revenue, reaching $558 million, outpacing its Q2 growth of 13%.
A significant portion of this revenue surge, approximately 45%, came from its commercial division, which experienced a 25% growth. With this pace, corporate revenue is on track to become Palantir’s largest segment.
More importantly, the company’s adjusted free cash flow (FCF) soared to $141 million, up from $96 million in the previous quarter, and its FCF margin now stands at a healthy 25% of sales, up from 18% in the last quarter.
In essence, Palantir is not only showing robust and growing revenue and cash profits but also an acceleration in their growth. This upward trajectory is driving PLTR stock higher, currently trading at $18.59, up over 3.4%.
Strong FCF Projection Boosts Valuation
Analysts forecast a rise in revenue to $2.22 billion for the current year, with an 18.5% increase expected to $2.63 billion in 2024. Based on a 25% FCF margin, the company’s free cash flow is estimated to range from $555 million to $658 million over the next 12 months, averaging over $600 million in FCF.
Furthermore, assuming continued growth in the FCF margin, say around 27%, the free cash flow could fall between $600 million to $710 million, or approximately $655 million.
These figures allow for the calculation of a target price. Using a 1.5% FCF yield, PLTR stock could be valued at $43.7 billion, obtained by dividing the forecasted $655 million FCF by 1.5%, equivalent to multiplying by 66.7x.
Price Targets for PLTR Stock Based on FCF Projections
Although this implies a 12.9% increase in valuation, it aligns with the substantial growth anticipated for the company. In other words, PLTR may reach at least $21.00 over the next year.
What’s the upper limit of its potential gain? If Palantir achieves a 35% FCF margin by the fourth quarter of 2024, with $3 billion in revenue by 2025, its run-rate free cash flow could surpass $1 billion. With the current market cap of $38.7 billion, its FCF multiple stands at only 38x. Using a 50x multiple (equivalent to a 2% FCF yield), the valuation could climb to $50 billion, indicating a 29% increase in its market cap and a price target of $24.00 per share.
Generating Income Through Shorting OTM Puts
Although Palantir does not currently offer dividends, shareholders can generate income by selling short out-of-the-money (OTM) put options with near-term expiration dates.
For instance, examining the put option chain expiring on Nov. 24, just three weeks away, the $17.00 put strike price, which is 8.87% below the current spot price, has a bid price of 33 cents. Sellers of these put options can immediately earn a 2.12% return ($0.33/$17.00). Repeating this every 3 weeks for a year, i.e., 17 times in the next 12 months, results in an annualized expected return of 36%.
This strategy not only offers an attractive expected return but also provides downside protection in case PLTR stock declines over the next 3 weeks.
In conclusion, investors can anticipate an increase in PLTR stock value over the next year. A practical approach is to sell short OTM puts while holding PLT stock, allowing investors to earn income while waiting for the stock to appreciate.
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