Palantir Technologies (NYSE:PLTR) has taken a huge hit. This is mainly based on a re-rating of its valuation in the past six months. But the company’s latest earnings, which show powerful free cash flow (FCF) growth, could help investors push PLTR stock higher.
Since Sep. 23, when Palantir peaked at $28.77, it had drifted down to $10.43 on Feb. 23. However, by Feb. 25, PLTR stock moved back up to $11.47.
This means Palantir stock has lost 60% of its value from the peak price. Moreover, year-to-date in 2022, PLTR stock is down 37% from $18.21 where it closed on Dec. 31.
Clearly, the market has been punishing Palantir. It is almost as if the company is slated to go out of business. But the truth is far from that.
Where Things Stand at Palantir
On Feb. 17, Palantir reported that 2021 revenue hit $1.54 billion, up 41% year-over-year (YOY) and slightly higher than analysts’ forecasts of $1.53 billion. Moreover, fourth-quarter (Q4) revenue was up 34% and adjusted FCF was $104 million. This represents a 24% margin on Q4 revenue of $433 million.
This is exactly what I was hoping for in my last article on Palantir when I talked about its huge FCF generating ability. At the time, I also was expecting that the company would be able to raise its FCF margin to 30%.
However, Palantir provided a more tepid margin outlook for 2022. In its earnings release, the company indicated that it expects operating profit margins of 23% in Q1 and 27% for the full year.
This is lower than what I hoping for, as FCF margins tend to be equal to or lower than operating profit margins. As a result, I decided to lower my FCF estimate going forward.
Analysts now forecast that 2022 revenue will reach $2 billion and $2.58 billion by 2023.
Where This Leaves PLTR Stock
At the time of this writing, PLTR stock has a market capitalization of $23.29 billion. Its price-to-sales (P/S) multiple for 2023 is 9 times sales. This is still fairly high, but a lot lower than it used to be.
However, given that its FCF margin is likely to be closer to 27% instead of 30% as I previously thought, its price target could be lower.
For example, let’s assume that Palantir makes 27% of $2.58 billion in revenue, or $697 million in FCF in 2023. We can use that to estimate its price.
Using a 2.5% FCF yield, which is the same as a multiple of 40 times, the target market cap will be $27.88 billion. That is 19.7% over the market cap of $23.29 billion.
So, this implies that the target price for PLTR stock is 13.73 per share (i.e., 1.197 x $11.47 stock price on Feb. 25). That is almost 20% over the price of $11.47.
What To Do With PLTR Stock
Analysts are still positive on PLTR stock, but they have lowered their price target significantly, as I have. For example, TipRanks reports that 8 analysts have an average price target of $13.17, or 14.8% over $11.47. But this is much lower than the price target they had last month of $20.71, as I explained in my last article.
The same is true for Refinitiv, whose analyst surveys are used by Yahoo! Finance. Their report shows that 9 analysts have an average price target of $15.94. In fact, Seeking Alpha’s survey of 10 analysts has an even higher average price target of $17.11.
Investors should consider that this is a wide range of price targets. However, most of them, including mine, are at a lower absolute level. I think this is mostly due to the fact that analysts are lowering their valuation metrics. They are lowering the price-to-cash flow multiples and price-to-sales multiples for PLTR stock.
However, I think now the stock has probably hit bottom or close to it. This is because the company is very profitable and is projecting both good sales and earnings growth going forward. For the time being, I think PLTR stock is fairly valued and should move higher as its earnings and margins rise.
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.
