Palantir Worth More Thanks to Free Cash Flow Forecast
Palantir (NYSE:PLTR), the government and business data analysis firm, presented an optimistic outlook for 2021 with its 2020 results. Palantir’s revenue of $ 322 million for the quarter was up 40% from a year ago. The company also predicted that the 5-year term income would be nearly four times over $ 4 billion, up from $ 1.1 billion in 2020. Therefore, I estimate that PLTR stock is worth at least $ 31.15, which is 16% more than its current price as of March 15.
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I described in my previous article on Palantir last month how I derived this assessment. It is based on a projection of the company’s strong free cash loans flow over the next five years. I used a margin analysis based on the company’s revenue forecast.
This represents $ 49.6 billion. After adding an additional $ 7.66 billion in discounted future accumulated cash, I think Palantir is worth $ 57 billion. This works out to $ 31.15 per share or 16% above the March 15 price of $ 26.79.
What analysts are now saying about Palantir
Barron’s magazine rightly points out that Wall Street seems divided on valuation of Palantir. Some say the results were too heavily biased towards public procurement work. This represents 59% of gross income. Some feel that it is too heavy a concentration for one type of client.
Others, however, like the new 5-year revenue target of $ 4 billion. This implies an annual growth rate of 30%, which should have repercussions on its valuation in the future. That’s what Goldman Sachs analyst Christopher Merwin thinks about PLTR stock. Its target price is $ 34, which is above my goal of $ 31.
But others, like William Blair analyst Kamil Mielczarek, think the 30% growth rate in software sales is too optimistic. He lowered his recommendation to “underperform” compared to “market performance”.
Additionally, Citigroup analyst Tyler Radke estimates PLTR stock to be worth just $ 15, according to Barron magazine. Now that the company’s internal blockage on sales is over, and of insiders are now selling some of their shares, he thinks the PLTR stock will fall much lower.
Additionally, TipRanks reports that seven analysts have an average goal of $ 25.83, which represents a potential drop of 4% from March 15. Additionally, Marketbeat.com states the target price of eight analysts is an average of $ 23.57.
Basically, other analysts are not very bullish on the outlook for PLTR shares to rise.
What to do with PLTR stock
As it stands, the stock of PLTR is actually quite expensive, 33 times forecasted sales for 2021 and 25.6 times next year’s sales. My projection of the stock’s value at $ 31.15 reflects its powerful generation of free cash flow. So far, the company is not producing free cash flow.
Therefore, there are a lot of risks in this assessment. We can put some probabilities on the potential results for the PLTR stock and then deduce an expected return.
For example, let’s project that there is at least a 50% chance that the PLTR stock will be profitable FCF and that it will reach $ 35 in the next three years. This represents a potential return of 30.6% and an expected return of 15.3%.
Now, to fill in the probability estimates, let’s say there is a 30% chance that the stock will drop 20% to $ 21.43 during the same time period. This translates into an expected return of minus 6% (i.e. 30% x -20% = -6%). Finally, let’s say there is a 20% chance that the stock will stay stable or only increase by 10%. That’s an expected return of 2%.
Now we have the three scenarios, the probabilities add up to 100%, so we can add up the expected returns. This means that we add + 15.3% in the first scenario to a negative expected return of 6% in the second and + 2.0% in the third scenario. This corresponds to an expected total return of 19.3%.
This means that we can expect, based on our best-performing analysis, that PLTR stock will hit $ 31.96 within three years. Note that this is close to our FCF analysis projection of $ 31.15. Our analysis therefore results in a price projection of between $ 31.15 and $ 31.96 for the PLTR share, or between 16% and 19.3% above the March 15 price.
As of the publication date, Mark R. Hake does not hold a long or short position in any of the securities mentioned in this article.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.