Palantir Technologies, a prominent player in the data analytics and software industry, has recently seen significant insider activity. According to a recent 144 form, CEO Alex Karp sold 585,000 shares of common stock on August 20, 2024. Despite this, the stock rose by 0.68% the following day. As an amateur investor (starting to look into use of options), should I consider investing in Palantir based on its latest results, investment moats, risks, current price, intrinsic value, analyst forecasts, and the price to invest with a margin of safety?

Palantir Technologies possesses several key investment moats:

1. Proprietary Technology: Palantir's software platforms, such as Gotham and Foundry, are highly specialized and cater to both government and commercial clients. These platforms are difficult to replicate, providing a significant competitive edge.

2. High Switching Costs: Once integrated into a client's operations, Palantir's software becomes deeply embedded, making it costly and complex for clients to switch to competitors.

3. Strong Client Relationships: Palantir has long-term contracts with government agencies and large corporations, ensuring a steady revenue stream and reinforcing its market position.

4. Data Network Effects: As more clients use Palantir's platforms, the data collected enhances the software's effectiveness, creating a self-reinforcing cycle of improvement and client retention.

Despite its strengths, Palantir faces several risks:

1. Regulatory Scrutiny: Given its involvement with government agencies and sensitive data, Palantir is subject to stringent regulatory oversight, which could impact its operations.

2. High Valuation: Palantir's stock has been highly volatile, and its valuation may not always reflect its intrinsic value, posing a risk to investors.

3. Dependence on Key Clients: A significant portion of Palantir's revenue comes from a few large clients. Loss of any major client could adversely affect its financial performance.

4. Insider Selling: Recent insider selling by CEO Alex Karp could signal potential concerns about the company's future prospects, although it might also be part of routine financial planning.

Current Price - As of market close on August 22, 2024, Palantir's stock price is $31.92 per share.

Intrinsic Value vs. Analyst Forecast

- Intrinsic Value: Assuming a conservative growth rate and discounting future cash flows, Palantir's intrinsic value might be estimated around $35-$45 per share.

- Analyst Forecast: Analysts' target prices for Palantir range from $30 to $50, reflecting differing views on its growth potential and market conditions.

Price to Invest with Margin of Safety (Target Price)

To ensure a margin of safety, it is prudent to invest at a price below the intrinsic value. Given the intrinsic value range of $35-$45, a reasonable entry point would be around $30-$35 per share. This provides a buffer against potential market volatility and unforeseen risks.

Given that current price is within the target price range of $30-$35 per share with margin of safety, 2 ways that I can approach investing in Palantir.

1. Direct Purchase: Acquire shares on the open market at or below the target price range of $30-$35 per share with margin of safety.

2. Sell an At the Money (ATM) Cash Secured Put option on Palantir. This will help me acquire Palantir below target price range of $30-$35 per share. For example (prices based on market close as at August 22, 2024), sell Cash Secured Put option strike price $31.50 expiring September 20, 2024 for $2.07 premium per share.

- If Palantir stays below $31.50 by expiration, I will be obligated to buy 100 shares per contract at $31.50. After deducting premium of $2.07 per share, net purchase price will be $29.43 per share.

- If Palantir stays above $31.50 by expiration, I keep the $207 premium per contract and can sell another Cash Secured Put to earn income while waiting for Palantir share price to be below target price range.

The latter seems to drive a better bargain. 🙂