Palantir Technologies (NYSE:PLTR) went on a run in June. PLTR stock gained 15% on the month, almost seven times the return of the S&P 500.
There’s no question that the data analytics software company has the momentum heading into the second half of 2021. Its stock traded as high as $45 in January.
Can it get back to the $40s by the end of the year? Let’s consider the possibilities.
PLTR Stock IPO Was $7.25
Sometimes I think investors forget that Palantir’s been a public company for just nine months, going public on Sept. 30 with a direct listing reference price of $7.25. It gained 31% on its first day of trading and is up more than 150% since then.
Were it to get to $40 by the end of the year, its annualized return would be approximately 10 percentage points higher than today. So, if you bought today – as I write this, it’s trading around $26 – you’d be looking at an annualized return of almost 104%.
But it’s got to get there first.
When I last wrote about Palantir in early May, I sent a mixed message to readers.
On the one hand, I thought CEO and co-founder Alex Karp’s 2020 compensation was exceptionally obscene. Karp took home nearly $1.1 billion in cash and stock compensation. His pay accounted for 4.9% of Palantir’s revenue for 2020.
His compensation was exceptional; The New York Times reported that Karp was the highest-paid CEO of a publicly traded company in 2020.
So, not only do you have to be good with the fact that Palantir has an exceedingly high valuation at 40.7x sales, but you also have to reconcile the fact you’re buying a stock whose CEO is tops in CEO compensation, putting him on the AFL-CIO’s dartboard as public enemy No. 1.
But go ahead and make the play.
What’s to Like About Palantir
I finished my May article by suggesting readers wait for the teens, preferably $15, before buying PLTR stock. It got as low as $17.06 on May 11 but never made it to $15. Since the low, it’s up 55%. I had the right idea. But got a little greedy with the $15 buy call.
Ah, you gotta hate market timing.
In April, I suggested that as long as the Ark Innovation ETF (NYSEARCA:ARKK) continued to hold Palantir in the middle of the pack in terms of the fund’s holdings, it remained a stock to buy in the teens. That feeling didn’t change in May.
However, Cathie Woods’ ARKK weighting has increased to 15th spot as of July 1, at 2.38%. That puts it just outside the top 10 and much higher than in April. Her commitment to Palantir’s getting stronger, although some of that is due to capital appreciation.
So, what is it that Wood finds so irresistible about Palantir?
I’ll lean on InvestorPlace’s Mark Hake for a possible answer.
Hake recently argued that its tremendous free cash flow (FCF) and high FCF margin suggest it’s worth at least $33.59 per share, moving higher as it generates increased FCF from increased revenues.
I love FCF stocks, so his comments piqued my interest.
According to Morningstar, Palantir has a trailing 12-month (TTM) FCF of $110 million. Based on a market cap of $49.5 billion, it has an FCF yield of 0.22%. Thus, its FCF yield is 9.2%, which is good, if not great. For comparison, Apple’s (NASDAQ:AAPL) is 27.8%.
However, Hake’s point is that the probability of its FCF margin moving into the teens is likely. So, based on a projected 15% FCF margin and $2.4 billion in revenue (double the current TTM sales), it would have $360 million in FCF.
Assuming the FCF yield were to stay as it is at 0.22%, it would have a market capitalization of $164 billion. Based on 1.88 billion shares outstanding, we get a share price of $87.23.
Now, a lot has to fall into place for this to happen, and none of it will come to fruition in 2021 or 2022, for that matter.
The Bottom Line
I personally wouldn’t buy PLTR stock because of Karp’s compensation. It’s truly obscene.
However, for those who don’t care about CEOs being overpaid, I think the current downside to PLTR isn’t all that great. It’s on a roll. Things in motion tend to stay in motion until an event gets in the way.
So, if you get in for the short-term, say 60 to 90 days, you’ll probably do OK. But if you get in for the long term, I would look for its FCF margin to get to 15% and its FCF yield to move well above 1%. Until then, you’re going to get a lot of valuation naysayers.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.