Trading at $23 and change, I’m wondering if this is the bottom or could investors do better by waiting until it falls into the teens. If you’re an aggressive investor, I think you do both.
The last time I wrote about Palantir was July 27. Then, although I had a problem (and still do) with CEO Alex Karp’s compensation, I was generally upbeat about the data analytics software company.
“I wouldn’t personally invest because of my distaste for excessive CEO compensation. But the side bets [the company’s 14 SPAC investments] can provide an equity kicker similar to what you might get from debt financing,” I wrote in July. “If and when its price reaches the teens, PLTR stock will be an excellent buy.”
Of course, I wrote those words before the company delivered a home run in the second quarter. Palantir beat the analyst revenue estimates for the second quarter. Even better, it expects 2021 full-year adjusted free cash flow (FCF) above $300 million, up from its previous guidance of $150 million.
The company’s foundation is getting stronger through many of its moves to grow its commercial, non-governmental business. In Q2 2021, it grew commercial revenue by 90% year-over-year, while its commercial customer count jumped 32% year-over-year.
It finished the first half of 2021 with $201 million FCF and an FCF margin of 28%. Annually, from 2021 through 2025, it expects to grow revenues by 30% or more.
In 2020, it had $1.1 billion in sales. At 30% year-over-year growth, 2021 sales should be $1.43 billion with an FCF margin of 21% or higher.
So, based on an adjusted full-year FCF of $300 million and a current market capitalization of $45.2 billion, it has an FCF yield of less than 1%.
That’s not in the ballpark for value investors.
As I discussed in my last article, Palantir holds minority investments in a large number of SPACs (special purpose acquisition companies). In fact, it’s invested $310 million in 14 different SPACs to date.
On Sep. 1, Palantir announced that it would make an equity investment in BlackSky Technology (NYSE:BKSY) — operates a technology platform for geospatial intelligence monitoring — after BlackSky completed its merger with Osprey Technology Acquisition Corp. on Sept. 9.
All 14 of these investments aren’t just financial investments. They also include arrangements to work together. Some believe the company is buying revenue with the investments.
However, suppose one or two turn out as successful as Shopify’s (NYSE:SHOP) $2-billion windfall from investing in Affirm Holdings (NASDAQ:AFRM). In that case, I don’t think investors will be too concerned about any allegations of revenue stuffing.
The Bottom Line on PLTR Stock
Palantir is growing its two operating segments, with or without these 14 SPAC investments. So forget about them and focus on its core business.
If you believe that it can sustain 30% year-over-year revenue growth, a purchase now, with funds set aside in case it falls into the teens, makes sense for the aggressive investor.
InvestorPlace’s Chris Lau recently discussed how Palantir is transforming industries, but its stock isn’t cheap at 40x sales. That said, he believes that an investment in PLTR makes sense.
“Palantir looks like a risk-free investment. The stock has low volatility, and many investors seem to be confident that the company’s contracts will be renewed at higher rates. As Palantir adds more customers in more markets, its potential revenue will increase,” Lau wrote on Oct. 2.
My colleague values PLTR at $28. It trades today at a little more than $23.
As I said, if you’re an aggressive investor, buy some now, and watch to see if it retreats into the teens. If it does, back up the truck and buy more.
Long-term, Palantir appears to be playing in the right sandbox for significant gains.
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.