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Palantir Is Worth 68% More Given Its Huge and Consistent Free Cash Flow

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Palantir (NASDAQ:PLTR) is now worth even more than before given the excellent quarterly results it released on Nov. 9. As a result, I have raised my target price for PLTR stock to $38.81, up from $37.87 in my last article on Palantir stock.

A close-up shot of a hand on a screen with the Palantir (PLTR) logo.
A close-up shot of a hand on a screen with the Palantir (PLTR) logo.

Source: Ascannio / Shutterstock.com

This is solely due to the strength of the company’s powerful free cash flow (FCF) generation. In fact, in the last quarter, it produced an adjusted FCF of $119 million, representing a 30% margin on revenue of $392 million.

That is a fantastic result. It also allows us to forecast the company’s value going forward.

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What Palantir Stock Is Worth

Analysts now forecast revenue will rise to $2 billion by 2022 and $2.56 billion in 2023. This is slightly higher than a month ago, when the average of 10 analysts was for $2.5 billion in revenue by 2023.

As a result, using a 30% FCF margin metric, we can estimate that Palantir will produce $768 million in free cash flow by 2023. This is the result of multiplying 30% times $2.56 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 $768 million in forecast FCF by 1%, the target market value is $76.8 billion.

So, compared to Palantir’s current $45.77 billion market capitalization, Palantir is worth 67.8% more than today. As PLTR stock closed at $23.13 on Nov. 16, we can estimate that PLTR stock is worth $38.81 per share.

That helps us set a significantly higher target price on the stock even though it has been languishing for the past several months. For example, on Sept. 23, PLTR stock hit a recent peak of $28.77. Its prior peak was on Jan. 27 at $39 per share.

So, from its peak on Sept. 23, it is down 20%. From Jan. 27, it is off by $15.87 per share, which is more than 40%. This makes PLTR stock a value play, as its value is increasing but the stock is falling.

Why Palantir Is So Valuable

The truth is Palantir’s growth rate is very stable and its free cash flow is quite consistent. This makes the company and the stock very worthwhile to own.

For example, in the quarter ending Sept. 30, revenue rose 36% to $392 million. In addition, analysts forecast sales for 2021 will reach $1.53 billion.

This will be up 40% from $1.o9 billion in 2020. Next year’s expected revenue of $2 billion will be up 30.7% from this year, and 2023 will have a 28% revenue growth rate.

This consistent revenue growth is a function of the types of contracts that Palantir is able to sign up. Many of their customers are large commercial enterprises and government agencies with long-term contracts. For example, I wrote recently about a recent $823 million Army contract the company won that should last a good number of years.

As of Sept. 30, Palantir has $234.8 million in current and non-current deferred revenue. This amounts to future revenue that the company expects to book some time in the next year or so, depending on when the contracts were signed. Therefore, Palantir already has a good portion of its growth rate “baked in,” so to speak.

What to Do With PLTR Stock

At this point, it makes sense for most value investors to begin accumulating shares of PLTR stock, given how consistent and powerful its FCF has been proven to be. Moreover, now that the stock is well off of its highs, it can be legitimately seen as a great entry point for value investors.

Think of its prospects this way. Even if it takes two years for PLTR stock to rise 67.8% to its target value of $38.81, the average annual return will be 29.54% for the next two years. That is an excellent ROI for most investors.

On the date of publication, Mark R. Hake did not hold a position directly or indirectly in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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