The “Outlook” section in Palantir Technologies’ (NYSE:PLTR) Q4 2020 earnings presentation gives us the most important take-away. The company boldly projects that its revenue will grow to $4 billion or more by 2025. Based on the company’s projections I believe one should expect to see PLTR stock rise at least by 35% annually over the next three to five years. Here’s why.
Since Palantir made $1.1 in sales last year, this implies revenue will grow to 3.63 times and 4.5 times at $5 billion. Assuming revenue is $5 billion by 2025, this works out to a 35.4% annualized compound growth rate. This is a very high growth rate and is a sign of a very confident company.
I suspect that confidence and ebullience will bleed over into the price of PLTR stock.
Outlook and Valuation
Palantir projects that its 2021 revenue will exceed 30% growth year over year and its Q1 2021 revenue growth will grow by 45% YOY. This exceeds the company’s implied 35% annualized growth rate. In other words, the company believes that it is on track to meet its growth targets.
More importantly, Palantir also projects that its Q1 2021 adjusted operating margin will rise to 23%. This is lower than the adjusted operating margin of 32% in Q4, but significantly higher than the average 2020 margin of 17%.
The reason this is important is that if Palantir’s sales keep growing at a 35% rate and its operating margin rises by 35% (i.e., 23% / 17% = 35% growth), expect to see dollar profits to skyrocket. That will feed directly through to a higher PLTR stock price.
For example, let’s assume that by 2025 Palantir makes 23% on $5 billion in revenue. That means it will make $1.15 billion in adjusted operating profit. If fact, if margins rise to 32% (the Q4 2020 rate), then expect to see $1.6 billion in adjusted operating profits. After taking a 25% tax deduction, net income would be $1.2 billion. At today’s $42.2 billion market value, that puts the stock on 35 times multiple 5 years out.
That number has to be adjusted by a discount rate to account for the time value of money and other risks. At a 10% discount rate, the adjusted net income is worth 62.09% of that amount (the discount factor). Therefore, its present value is $745 million (0.6209 x $1.2 billion). This raises the price-to-earnings multiple to 56 times.
This valuation is significantly lower than its present multiple of 140 times 2021 earnings and the 106.6 multiple for forecast 2022 earnings.
Where This Leaves PLTR Stock
Projecting out the same multiple for $745 million in earnings puts PLTR stock at a market capitalization of $78.97 billion (i.e., 106 x $745 million). This is 87% higher than its price today, or $41.46 per share.
However, don’t expect to see PLTR hit that target within the next year. The market needs to realize that Palantir will make 32% operating margins on $5 billion in revenue by 2025. Typically, analysts will project out earnings 2 years in the future. Therefore, by 2023, they will be looking at 2025 earnings. In other words, expect to see PLTR stock rise to $41.46 in three years or so.
This implies an average return of 87% over three years or a CAGR (compound annual growth rate) of 23.1% annually over the next three years. That is a very high ROI for most investors.
Granted, this type of expected return is not the typical fare that will satisfy most value investors. It’s more typical of what growth or momentum investors will be willing to pay. Keep in mind that I am projecting earnings out 5 years in the future, albeit using a 10% present value factor. In addition, I use a 106 times earnings multiple, the same as today’s 2022 forecast multiple. That is very high for most investors.
So keep this in mind: Palantir is a high-risk, high-return stock. Nevertheless, my assessment is that PLTR stock could rise 87% in three years to $41.46 per share.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.