It’s really sad about Palantir (NYSE:PLTR) stock. Since the company released its stellar earnings report on Nov. 9, PLTR stock has been dropping like a rock. But it doesn’t deserve this.
And it’s not like the stock is super overvalued. In fact, as I pointed out in my article last month on Nov. 17, it’s very undervalued.
On Nov. 9, when earnings came out, PLTR stock was at $24.25, and, in fact, it had peaked at $26.75 on Nov. 8. But as of Dec. 16, it was at just $18.17 with a market cap of just $36.79 billion.
Moreover, since Sept. 23, it peaked at $28.77 and has dropped $10.60 or $36.8% since then. But does that really seem right for a company that produced robust 36% YoY quarterly revenue growth and 103% commercial revenue growth?
Where Things Stand at Palantir
And it’s not just that. Palantir also generated huge operating cash flow and free cash flow (FCF) during the quarter.
For example, take cash flow from operations of $101 million, a 26% margin. Moreover, its adjusted free cash flow was $119 million, which represented 30% of its total revenue of $392 million during the quarter.
In other words, the company is extremely profitable, including on a cash flow basis. In addition, Palantir noted that it expects its revenue to rise 40% year-over-year (YoY) in 2021 to $1.527 billion.
As if that is not enough, analysts foresee 2022 revenue growing over 29% to $2 billion next year and $2.58 billion by the end of 2023. That represents a growth rate of 68.6% in just two years.
So from that standpoint PLTR stock trades for just 14 times 2023 revenue. Moreover, the likelihood is that revenue will surprise on the upside for this company since its contracts have a recurring element to them. Most of its contracts are with the government or large corporations, which tends to make them sticky.
This makes the recent drop in PLTR stock look like it is too much. And it does not look sustainable.
What Palantir Stock Is Worth
Analysts now forecast revenue will rise to $2 billion by 2022 and $2.58 billion in 2023. This is slightly higher than a month ago when the average of 10 analysts was for $2.56 billion in revenue by 2023.
As a result, using a 30% FCF margin metric, Palantir could have $774 million in free cash flow by 2023. This is the result of multiplying 30% times $2.58 billion.
Following on with this, we can estimate its value. For example, using a 1% FCF yield metric, we can put together a target market cap value for Palantir.
Here is how that works: If we divide the $774 million in forecast FCF by 1%, the target market value is $77.4 billion. That is 110% higher than Dec. 16’s market cap of $36.79 billion.
Now even if that takes 2 years to happen, the average annual return on a compounded basis is 44.9% for each of the next two years.
So, here is what that means. Next year PLTR stock is worth $26.46, i.e., 44.9% over Dec. 16’s price of $18.26. And the year after that, it is worth $38.34 per share.
What To Do With PLTR Stock
Analysts these days are still positive on PLTR stock. For example, Seeking Alpha reports that its survey of 10 analysts who’ve written on the stock is an average price target of $24.22 per share.
That represents a potential 32.6% gain over Dec. 16’s price. It’s also close to my price target for next year of $26.46 per share.
The same is true at TipRanks.com. Their survey of eight analysts who’ve written on the stock in the last three months is a price target of $23.14 per share. That is 26.7% over Dec. 16’s price.
So analysts’ average price targets range between 27% and 33% over Dec. 16’s price, or about 30% on average. So, even if you don’t believe my 45% higher price target for next year, you can rely on other analysts who believe it’s worth 30% more. That puts its value at $23.74 per share, 30% over Dec. 16’s price.
On the date of publication, Mark Hake did not hold (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.