Palantir Technologies (NYSE:PLTR) announced its latest group of 10 early-stage companies to join its Foundry for Builders initiative. Launched in July, I continue to be fascinated by the initiative’s potential to move PLTR stock higher.
Here’s why I feel this way.
Over the past month, Palantir stock has gained 14%. As I write this, it trades around $26. Another 15% bump over the next month would get PLTR to $30 for the first time since February.
In July, I discussed how its side bets could be very lucrative for the company over the long haul. At the time, it had made six SPAC (special purpose acquisition company) investments. By the time I’d covered Palantir again in early October, the number was up to 14, totaling $310 million. In my commentary, I mentioned its equity investment in BlackSky Technology (NYSE:BKSY). BlackSky stock’s done little in the month since.
As I was contemplating what to discuss for this article, I read with interest the company’s October press release announcing the 10 latest additions to the Foundry for Builders initiative.
Palantir launched the initiative in July. It gave five early-stage companies the platform to use on a subscription basis, ostensibly to keep the start-ups’ costs down while getting first-hand knowledge of Palantir’s Foundry platform.
It’s a win-win.
So to see 10 more added to the initiative suggests that Palantir management is reaping tremendous benefits, enough to increase the cohort by two-thirds. Some of the newest group are existing Palantir customers in the blockchain and digital health industries.
Of the latest 10, I’m most interested in KatalystDI, which automates supply chain data in the construction industry. My wife works in the industry. So anything that can modernize construction is welcome, in my opinion.
All of these relationships the company is building lay the groundwork for future revenue wins like the $828 million contract it secured in early October from the Army.
If PLTR stock will get to and stay above $30, it needs to foster more of these relationships. I continue to watch with fascination where this all leads.
Maybe nowhere, but I think this is a smart way to demonstrate your products’ utility until proven otherwise.
PLTR Stock Free Cash Flow Generation
In the second quarter, PLTR stock generated adjusted free cash flow (FCF) of $50 million. That was 13% of its Q2 2021 revenue. For the first six months ended June 30, it had $201 million in adjusted FCF and a 28% margin.
Now, for all of 2021, it expects an adjusted FCF of at least $300 million. Based on the analyst 2021 revenue estimate of $1.51 billion, we’re talking about a 20% FCF margin. Grow sales by 30% in 2022 through 2025, and by the end of 2025, Palantir could be generating FCF of $863 million [2025 revenue of $4.31 billion x 20%].
Palantir’s $209 million in research and development spending through the first six months of 2021 represents 29% of its revenue. Over the next four years, that percentage will likely drop into the mid-to-low teens. That will create more FCF as a result.
I could see its FCF margin being closer to 30% by 2025, which would generate $1.3 billion in FCF. At the end of the second quarter, Palantir’s total debt was just $250 million or less than 1% of its market cap.
It won’t need the free cash to pay down debt unless it decides to go big-game hunting for acquisitions. I doubt as a growth company; it would be into paying dividends. So, that leaves share repurchases, investing in its own business, and investing in others.
It’s already made 14 investments in SPACs. Add a few from the 15 early-stage companies in the Foundry Builders initiative, along with new additions to the program, and it will have a lot of places it can park its free cash flow.
In the end, the real value will be had by Palantir Foundry and Gotham adding customers between now and the end of 2025. If it does, $30 will seem like a penny stock to long-time Palantir shareholders.
That said, I’ll continue to watch the Foundry Builders initiative with interest.
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.