After going public in late 2020 and quadrupling in early 2021, Palantir (NYSE:PLTR) stock has fallen a good deal. It has lost over two-thirds of its value (-68%). It peaked at $39.00 on Jan. 27, 2021, but, as of the morning of Feb. 4, 2022, a year later, it’s down to $12.43 per share.
Moreover, Palantir hit a low price of $12.28 on Jan. 27, not far from it is on Feb. 4. In other words, the market is really still down on PLTR stock.
What in the world is going on here? I talked about how unrealistic this seemed in my article on Dec. 17, 2021: “Palantir Keeps Falling Despite Fantastic Financials.”
This is because not only are the company’s financials very profitable, but the company also projected a good growth outlook. Therefore, the only reason why PLTR stock could have drifted so low was valuation. The market might have deemed its valuation metrics too high.
Where This Leaves Palantir Stock Now
Even if that is true, its valuation now can’t be deemed as expensive. For example, analysts forecast revenue to rise 30% from an estimate of $1.53 billion in 2021 to $1.99 billion by the end of 2022.
Given that Palantir has a market capitalization of $26.7 billion now (according to Seeking Alpha), that puts its forward price-to-sales (P/S) multiple at just 16.3 times. And for 2023, with a revenue forecast at $2.55 billion, the 11x P/S multiple does not seem excessive.
Moreover, Palantir could produce a 30% free cash flow (FCF) margin this year, based on its recent Q3 FCF financials, as I described in my last article.
Therefore, by 2023, its FCF could reach $765 million in 2023. We can use this to derive one measure of its value.
Valuing Palantir Stock
Following on with this, we can estimate its value. For example, using a 1.5% FCF yield metric, we can put together a target market cap value for Palantir.
Here is how that works: If we divide the $765 million in forecast FCF by 1.5%, the target market value is $51.0 billion. That is 79% higher than today’s market cap of $28.47 billion.
This means that Palantir should be trading 79% higher than its price today at $12.43. That gives PLTR stock a target price of $22.30.
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 $20.56 per share.
That represents a potential 65.1% gain over today’s price of $12.43. It’s also close to my price target for next year of $22.30 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 $20.71 per share. That is 66.3% over today’s price and close to my $22.30 price target.
In addition, Yahoo! Finance, which uses Refinitiv’s analyst survey data, has a page that shows 10 analysts have an average price of $20.17 per share.
In short, analysts’ price targets are within about 10% of my price target. My model is simple and uses a simple FCF margin method vs. forecast sales and a 1.5% FCF yield metric for PLTR stock.
What To Do
Palantir says it will release its Q4 and full-year earnings on Feb. 17. Value investors will probably want to average down into PLTR stock before then as it has likely already hit a bottom.
As a result, they should be able to lower their average cost and also be set up to make a good return. Even if it takes two years for the stock to rise 79% to $22.30, the average annual return on investment (ROI) is 33.8% each year. This is the average return for each of the two years on a compounded basis. That is a very good return for most investors.
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.