Palantir Is Almost Ready to Boogie, But Which Way? Try This Trade

On Monday morning Palantir Technologies (PLTR) released the firm’s third quarter financial results. The results were seen as pedestrian at best.

Palantir was an old favorite of mine going back to the very start of its life as a publicly traded company. First I was up, then I was down, and then I was down some more. Once I was down 8%, I took my leave. Readers will recall my 8% rule. For the new kids, I try very hard never to let myself lose more than 8% on a position unless it happens when I am asleep. Part of risk management.

Well, since the stock’s apex in September 2021, the share price has fallen roughly 73%. I placed PLTR in the “Stocks Under $10” bullpen a while back. It’s still there, not yet having earned a promotion to the actual portfolio.

For the three month period ended September 30th, Palantir posted adjusted EPS of $0.01 (GAAP EPS: $0.06) on revenue of $477.88M The adjusted earnings print fell a penny short of Wall Street’s expectations, while the revenue number was good enough for year over year growth of 21.9% and did beat consensus.

Income from operations amounted to $-62.191M (-13%), as adjusted income from operations printed at $81.25M (+17%). Total net income landed at $-123.875M. By far, the lion’s share of the adjustment was made for stock based compensation, which amounted to $140.308M. Adjusted EBITDA grew 18% to $87.192M, while adjusted free cash flow improved 8% to $36.56M.

Nuts & Bolts

– US Revenue increased 31% to $297M.

– US government revenue grew 23%.

– US commercial revenue grew 53%.

– Customer count grew 66%.

– US customer count grew 124% to 132.

– Total contract value closed of $1.3B.

– Total US contract value closed of $1.1B.

Outlook

For the current quarter, after figuring on a negative $5M impact from foreign exchange, Palantir expects to generate $503M to $505M in revenue. Excluding FX, the firm would have expected $508M to $510M. Wall Street was generally around $506M on this number. The firm expects to produce adjusted income from operations of $78M to $80M.

For the full year 2022, after figuring on an additional negative $6M impact from foreign exchange since last quarter, Palantir has reaffirmed revenue guidance of $1.9B to $1.902B. Ex-FX, Palantir would have guided revenue toward $1.906B to $1.908B. Wall Street was at $1.9B for this metric. The firm is also raising its outlook for adjusted income from operations for the full year from $341M-$343M to $384M-$386M.

Balance Sheet

Palantir ended the quarter with a net cash position of $2.489B, inclusive of current restricted cash and marketable securities, and current assets of $2.947B. Current liabilities amounted to $688.3M. This leaves the firm with a whopping current ratio of 4.28.

Total assets add up to $3.319B. There are no intangible assets claimed on the balance sheet. Total liabilities less equity comes to $932M. This includes no entry for long or short-term debt. Say one thing about Palantir, this is one of the highest quality balance sheets that you and I are ever going to find when analyzing stocks.

My Thoughts

I want to be crazy about PLTR. I really do, especially with that balance sheet that I truly admire. The fact is that gross profit margin decreased to 79.7% from 81.7% for the year ago comp. The truth is that GAAP operating margin hasn’t printed in positive territory yet. The truth is that free cash flow margin has dropped to 7.7% from 30.4% a year ago. The fact is that the stock still trades at 162 times forward looking earnings.

Finally, the bottom line is that there is a business here, it does provide a necessary service to its clients, but even at this low per share price, the stock remains too darned expensive.

Readers will note that this stock did hit resistance at the (minimal) 23.6% Fibonacci retracement level at around $11.60 in early August. (My computer model does not provide the 23.6% and 78.6% levels, as they are a little more advanced than the standard Fib levels, so when they do matter, I have to draw them on the chart.)

Really going back before that, to April and May, these shares started to consolidate after the long selloff from the September 2021 levels. This has led to what looks like a “symmetrical triangle” or “closing pennant” formation. This type of chart pattern often leads to a violent breakout in one direction or the other. The fundamentals are mixed. The technicals say this stock is almost ready to boogie. In which direction? I can’t say… but the risk/reward at these prices is greatly improved despite the highly stretched valuation. This is why my SU $10 portfolio still has this name in the bullpen.

My idea, instead of laying out the dough for an equity stake, would be to go out a few months and try to work some magic in the options market.

Trade idea (minimal lots)

– Purchase one PLTR January 20th $7.50 call for about $0.86.

– Sell one PLTR January 20th $10 call for roughly $0.20.

– Sell one PLTR January 20th $6 put for approximately $0.28.

Net debit: $0.38.

Note: The idea here is to play the name to the upside in a risk averse way. The trader is partially subsidizing the purchase of the $7.50 call through sales that both limit profitability and expose the trader to equity at $6 (a net basis of $6.38).