Palantir Technologies (NYSE:PLTR) will release its earnings for Q2 on August 12 before the market opens. If earnings follow what happened during Q1, expect to see the software company show powerful free cash flow (FCF) results. Since the company reported its Q1 results on May 11, PLTR stock has risen by 7.4% from $20.21 to $21.71 as of the end of July 30. I believe that it is worth at least 57% more at $34.

This is slightly over the $33.59 target price I put forth in my last article on Palantir on June 25, when PLTR stock closed at $26.78. The main reason is higher estimates for the company’s FCF using analysts’ updated forecasts.

Since then, the software company has since then announced a number of major deals. As a result, analysts have raised their forecast for sales and earnings.

Forecasting Palantir’s FCF

The main thing that Palantir announced was its huge FCF margins for Q1. This can be seen on page 5 of it Q1 slide deck. It shows that FCF rose from negative $290 million last year to $151 million by March 31, with a 44.3% FCF margin (i.e., $141 m FCF / $341 m Q1 sales).

Here is how we can use this. Analysts now estimate that revenue for 2022 will rise to $1.92 billion, up from $1.91 billion in my last article. So, if we apply the 44.3% margin estimate to this figure, FCF is forecast to be $850.2 million by the end of 2022.

However, just to be conservative, and because we don’t know what the Q2 FCF will be, let’s use a lower 40% FCF margin figure. That lowers its 2022 FCF estimate to $768 million, up from $764 million last month. However, keep in mind that if the company continues to show a 44% FCF margin from Q2 on, we can raise our estimate.

Valuing PLTR Stock Using FCF

One way to use Palantir’s FCF forecasts to measure its value is to use FCF yield. To do this, you divide the FCF forecast by a set FCF yield — often 1% or 1.5%, for example. Dividing $768 million (the 2022 FCF forecast) by 1% results in a target value of $76.8 billion. This is 88.2% higher than Palantir’s existing $40.81 billion market capitalization.

However, with just a slightly higher FCF yield metric of 1.5%, the target value is much lower. Dividing $768 million by 1.5% results in a target value of $51.2 billion. This is just 25.5% higher than Palantir’s market cap today.

So, Palantir is worth somewhere between $51.2 billion and $76.8 billion. On average that works out to $64 billion, or 56.8% over today’s $40.81 billion market value.

In other words, PLTR stock is worth 56.8% more than its July 30 price. That works out to $34 per share.

What To Do With PLTR Stock

Keep in mind that I am using a lower 40% FCF margin estimate than what the company produced in Q1. If its Q2 numbers come in below this margin level, maybe we will lower the price target, just to be conservative. And if the FCF margins come in higher and look to be sustainable, we could raise our estimate.

As I wrote last time, Wall Street analysts don’t see things my way. For example, Yahoo! Finance reports that the average of seven analysts’ price targets is $23. This is only slightly over today’s price (+5.9%). In addition, TipRanks reports that six analysts have an average target of $22.33, or 2.9% over the price on July 30. MarketBeat says $20.75, or 4.42% below today.

I don’t think most of these analysts’ targets will pan out. Besides, who needs an analyst telling us that the stock might rise 5.9%. That is a waste of time. Moreover, the average price target is slowly rising (even from a month ago).

I expect to see Palantir to produce solid results for Q2 with an equal to higher FCF margin. Look for PLTR stock to move closer to my $34 price target, or 56.8% over $21.71.

— Mark R. Hake

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Source: Investor Place