Palantir Technologies (NYSE:PLTR) released excellent results for the second quarter on Aug. 12, showing that it is still a powerful free cash flow (FCF) producer. As a result, I am sticking with my previous assessment that PLTR stock is worth around $34 per share.
My actual target price is now $34.32 based on the average FCF margin that I expect Palantir to have in the next two years. This means that I think PLTR stock is still worth over 28% more than its Friday closing price of $26.64 per share.
This target is a direct result of the company’s excellent results in Q2, where it produced first-half revenue growth of 49%. This can be seen on page 9 of the company’s slide deck presentation. That page also shows that it also generated $201 million in FCF during H1, reflecting a 28% FCF margin.
Granted, this was lower than the 44% margin it had during the first quarter, and which I discussed in my previous article. But we can use this to value Palantir’s value going forward.
Projecting Palantir’s Free Cash Flow
The software company has announced a number of major deals. As a result, analysts have raised their forecast for sales and earnings. For example, whereas for 2022 the previous estimate was for $1.92 billion, now they are forecasting $1.95 billion in revenue. This is an average of nine analysts’ estimates, including one that estimates $2.13 billion.
This also represents potential revenue growth of 30% over the $1.3 billion forecasts for this year. In fact, Palantir itself is now projecting “adjusted free cash flow to in excess of $300 million, up from in excess of $150 million” from last year. At that rate, the full-year adjusted FCF margin will be over 20%.
I believe that given that the company made a 44% margin in Q1, its overall FCF margin will improve to 30% by the end of 2022 or certainly by 2023. For example, analysts now project $2.49 billion in revenue for 2023. This represents a 66% increase in full-year sales over 2021 projected revenue of $1.5 billion. As a result, at 30%, FCF could hit $747 million.
However, since that is 2.5 years in the future, we need to discount it to the present value. Using a 10% discount rate, the discount factor is 0.788. Therefore, the present value of that FCF is $588.6 million. We can use this FCF estimate to value PLTR stock.
What Palantir Stock Is Worth
One way to value Palantir’s FCF forecasts is to use FCF yield. To do this, divide the FCF forecast by a set FCF yield — often 1%. Dividing $747 million (the 2023 FCF forecast) by 1% results in a target value of $74.7 billion (i.e., $747/.0.01=$74.7 billion).
This is 44.2% higher than Palantir’s existing $51.61 billion market capitalization according to Yahoo! Finance. That site tends to have the most accurate market cap calculations. It also implies that PLTR stock is worth 44.2% more than its price today ($26.64), or $38.41.
However, remember that this projection for 2023 FCF is 2.5 years in the future. We used a discount factor to bring it back to its present value. That resulted in an FCF of $588.6 million. Therefore, using a 1.0% FCF yield the target value is $58.86 billion (i.e., $588.6/0.01). This is 14% over today’s market cap and implies that the PLTR stock target should be $30.22.
So, in general, the stock price should rise to between $30.22 and $38.41 over the next two years or so. That implies an average target of $34.32, or 28% over today’s price.
What to Do With PLTR Stock
Analysts don’t agree with my ebullient forecast, even though so far I have been right about the stock. For example, TipRanks.com indicates that six Wall Street analysts have an average price target of $23.80 per share or 10.2% below today’s price. Moreover, Seeking Alpha says that eight analysts have an average target price of $24.76 per share.
So, you have my target price based on FCF estimates and a belief that its FCF margin will improve with higher sales, and on the other, you have analysts who are negative. Take your pick. So far I have been right. This might mean slowly acquiring a full position, with a view to averaging in at lower prices, if I turn out to be wrong.
On the date of publication, Mark R. Hake did not hold a position directly or indirectly in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
