To The Moon

We have seen bulls and bears both fretting over $Palantir Technologies Inc.(PLTR)$ . Bulls are focused on the improved profitability for Palantir stock. Bears are more into the decelerating revenue growth for Palantir stock.

One important buzz we need to consider is the artificial intelligence (A.I.) outlook for the maker of data analytics software. I think we need to focus on the longer term for Palantir. In this article, I would like to share on how the fair value looks like, future growth, free cash flow and also the technicals for Palantir.

PLTR Trading Near 50-Day MA Period

If we looked at how PLTR have been trading, it reaches a high at 27.50 which was on 07 March, and till date, the stock has advanced 34% in 2024, but now we are seeing that it is trading near or slightly below the 50-day MA period.

This is a key technical level for support, if Palantir could pick up above this level over the next few weeks, we could see Palantir continue to have upside for some period.

The effect or positivity of $Oracle(ORCL)$ and Palantir cloud computing partnership have not really helped, maybe it take time.

Bears Seem To Have Gaining Upper Hand

If we looked at how the trading have been for past 2 to 3 weeks, we could see that selling sentiment is very high, bears seem to be in control, and things seem to slow down, as seen from MACD, there might be a bullish reversal coming.

I would like to see Palantir clearing the support level at $23, it need to stay above it for some time. This is something that we can point to artificial intelligence software as a growth driver. Palantir has already mined the AI opportunity with government customers for intelligence gathering, counterterrorism and military purposes.

Palantir Free Cash Flow vs Earnings Analysis

If we were to look at Palantir’s free cash flow, it is healthy, this is important for a software company, as there might be new opportunity that they need to take, so cash flow is one important part. Investors often look at how efficiently a company can reinvest its earnings back into the business for future growth. FCF serves as a key metric in assessing this aspect. A company with ample free cash flow has the flexibility to fund research and development initiatives, acquire complementary businesses, or expand its operations organically, all of which can drive long-term shareholder value.

While net income is often used as a primary indicator of profitability, it can be influenced by accounting practices and non-cash items such as depreciation and amortization. FCF, on the other hand, focuses solely on cash transactions, providing a more accurate reflection of a company's ability to generate cash from its core operations.

Palantir with consistently positive free cash flow demonstrates its ability to generate cash internally, reducing the reliance on external financing or debt. Positive FCF indicates that the company has sufficient resources to invest in growth opportunities, return capital to shareholders through dividends or buybacks, and weather economic downturns without resorting to borrowing.

Palantir Fair Value (Look At Future Cash Flow)

In valuation models such as discounted cash flow (DCF) analysis, free cash flow is a critical input used to estimate the intrinsic value of a company. By discounting projected future cash flows back to their present value, we could see that PLTR ($22.84) is trading below the estimate of fair value ($55.97).

PLTR is trading significantly below fair value by more than 20%.

PLTR is expensive based on its Price-To-Sales Ratio

If we were to look at price-to-sales and compared to the peers of PLTR, it is expensive based on its Price-To-Sales Ratio (22.7x) compared to the peer average (10.7x).

But I would also look at how PLTR make money, and whether the growth is potential growing or it is showing sign of stagnant?

PLTR Forecast Earning Growth Better Than Industry

If we look at PLTR's forecast earnings growth (27% per year) is above the savings rate (2.3%). This show that PLTR's earnings (27% per year) are forecast to grow faster than the US market (14.6% per year).

Over the next 3 years, PLTR's earnings are expected to grow significantly with high-growth earnings. PLTR's revenue (15.9% per year) is forecast to grow faster than the US market (8.1% per year). PLTR's revenue (15.9% per year) is forecast to grow slower than 20% per year.

How Palantir Technologies makes and spends money.

If we look at how PLTR make money, the amount of revenue from government and commercial are closing up, and with services offered in more venues, we could see more commercial business revenue coming.

But at the end of the day, profitability have to continue as the expenses looked pretty high, as the company should be mature enough and is there a need to invest into new ways to build new capabilities?

I would think sales and marketing expenses could be reduced, as partnership might be a way to help Palantir to continue increasing their commercial business segment.

Summary

If we looked at how Palantir have been trading this way, we could understand the concern brought by the bear and also the growth driver by the bull.

There are some costs that need to be curbed as more and more contracts does not necessarily translate to better earnings (profits). I hope to see how Palantir aims to use generative AI to spur growth in the commercial market. The software maker has expanded into health care, energy and manufacturing.

Another part would be the $1 billion buyback announcement by Palantir in 2023, but we have not seen any shares bought as of 31 Dec. In a letter to shareholders, Chief Executive Alex Karp said: "For 2024, as a result of our sustained and growing profitability, we now see a path toward $800 million to $1 billion in adjusted free cash flow."

So I personally would think Palantir is for long term as we wanted to see its sustained and growing profitability realising.

Appreciate if you could share your thoughts in the comment section whether you think Palantir would continue to realise its sustained and growing profitability.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.