Palantir Technologies (NYSE:PLTR) stock surged to highs of $45 a year ago. The momentum failed to sustain and PLTR stock currently trades at $16.
Even after the recent decline, the stock commands a market capitalization of $32 billion. For the first nine months of 2021, Palantir Technologies reported revenue of $1.1 billion. This implies an annualized revenue potential of $1.5 billion.
Given the current market capitalization, PLTR stock trades at 22x 2021 revenue. Therefore, in January 2021, the stock was trading at over 50x the revenue potential for 2021. The correction, therefore, didn’t come as a surprise.
Is PLTR stock still overvalued?
In my view, the stock still trades at a premium valuation. At the same time, I believe that Palantir deserves the valuation premium. In other words, current levels are attractive for accumulation and the best part of the correction might be over.
My view is underscored by the point that eight analysts have a 12-month median price target of $24 for the stock. This implies an upside potential of 39%. The most bearish price target for the next 12 months is $15.
Revenue Growth Likely to Accelerate
Palantir has already been delivering robust growth. For the first nine months of 2021, the company reported revenue growth of 44% to $1.1 billion.
Importantly, the company’s key margins have witnessed significant improvement. Palantir reported operating cash flow of $240 million in the first nine months of in 2021. For the prior year comparable period, cash burn was $278 million.
Furthermore, Palantir guided for adjusted free cash flow of $400 million for 2021. Ultimately, valuations boil down to cash flows. I believe that cash flow will further accelerate.
Let’s look at the key reasons.
The order backlog for Palantir Technologies has witnessed acceleration. For Q3 2021, the company reported a backlog of $3.6 billion. On a year-over-year basis, the backlog swelled by 50%.
Based on 2021 revenue guidance, the order backlog provides more than two years of revenue visibility. As the backlog continues to swell, valuations will adjust on the upside.
The cryptocurrency world has been growing at a robust pace. Palantir Foundry is being touted as the “next generation software for next generation finance.” Palantir claims that the software has already helped financial organizations to lower their cost related to anti-money laundering by 90%. The software can be game-changing for the crypto space where billions have been lost due to hacks and scams.
The Foundry for crypto also allows “Web3 startups to build complex workflows on top of dApp metadata.” It’s very likely that revenue contribution from the crypto space will increase meaningfully in the coming years.
Palantir has guided for revenue growth in excess of 30% for the next four years. I would not be surprised if growth is well in excess of the lower end of the guidance.
Concluding Views on PLTR Stock
Palantir has clients from industries that include defense, healthcare and automotive. Further, the company has critical solutions for the financial services industry. Sectors like defense and healthcare are likely to witness increased spending in the coming decade. Further, these sectors are insulated from economic shocks. This is likely to ensure that Palantir witnesses steady growth in its order backlog.
From a financial perspective, Palantir reported cash and equivalents of $2.3 billion for Q3 2021. For the same quarter, the company reported an adjusted EBITDA margin of 30%. On a year-over-year basis, margin expanded by 400 basis points.
With growth in order book and operating leverage, margin will expand. Free cash flows will also swell. The company therefore has ample financial flexibility to invest in innovation.
Overall, PLTR stock looks attractive at current levels. After underperforming for most part of 2021, stock sentiment is likely to reverse in 2022.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.