Palantir is almost ready to boogie, but which way?  Try this deal

On Monday morning, Palantir Technologies (PLTR) published the company’s financial results for the third quarter. The results are viewed as pedestrian at best.

Palantir has been an old favorite of mine since its early days as a publicly traded company. First I was up, then I fell, and then I fell some more. After falling 8% I took a leave of absence. Readers will remember my 8% rule. As for the new kids, I try really hard to never allow myself to lose more than 8% on a position, unless it happens when I’m sleeping. Part of risk management.

Well, since the stock peaked in September 2021, the stock price has fallen approximately 73%. I put PLTR in “Stocks Under $10” a while back. It’s still there, it hasn’t earned a promotion to the actual portfolio yet.

For the three months ended Sept. 30, Palantir posted adjusted earnings per share of $0.01 (GAAP EPS: $0.06) on revenue of $477.88 million. The posted adjusted earnings fell a penny short of Wall Street expectations, while the number of revenue was good enough for year-over-year growth of 21.9% and beat consensus.

Income from operations came in at -$62.191 million (-13%), with adjusted income from operations printed at $81.25 million (+17%). Total net income reached -$123.875 million. So far, the lion’s share of the adjustment has been for stock-based compensation, which totaled $140.308 million. Adjusted EBITDA rose 18% to $87,192 million, while adjusted free cash flow improved 8% to $36.56 million.

nuts and bolts

– US revenue increased 31% to $297 million.

– US government revenue rose 23%.

– US trading revenue grew 53%.

– The number of customers increased by 66%.

– The number of customers in the US grew by 124% to 132.

– Total contract value of $1.3 billion.

– Total contract value in the US of $1.1 billion.

Outlook

For the current quarter, after accounting for a negative impact of $5 million from foreign currency, Palantir expects to generate revenue of $503 million to $505 million. Excluding FX, the firm would have expected $508 million to $510 million. Wall Street as a whole was about $506 million for that number. The firm expects to generate adjusted income from operations of $78 million to $80 million.

For full-year 2022, after accounting for an additional negative $6 million foreign currency impact from last quarter, Palantir reaffirmed revenue guidance of $1.9 billion to $1.902 billion. Ex-FX, Palantir would guide revenue to $1.906B to $1.908B. Wall Street was at $1.9 billion for that metric. The firm also raised its full-year adjusted earnings from operations outlook to $384M-$386M from $341M-$343M.

The balance

Palantir ended the quarter with a net cash position of $2.489 billion, including current restricted cash and marketable securities, and current assets of $2.947 billion. Current liabilities totaled $688.3 million. That leaves the firm with a huge current ratio of 4.28.

Total assets amounted to $3.319 billion. There are no intangible assets stated in the balance sheet. Total liabilities less equity totaled $932 million. This does not include a long-term or short-term debt entry. Say something about Palantir, it’s one of the highest quality balance sheets you and I will ever find when analyzing stocks.

My thoughts

I want to be crazy about PLTR. I really do, especially with this balance sheet, which I really admire. The fact is that the gross profit margin decreased to 79.7% from 81.7% in the previous year. The truth is that GAAP operating margin has yet to print into positive territory. The truth is that the free cash flow margin fell to 7.7% from 30.4% a year ago. In fact, the stock still trades at 162 times earnings.

Finally, most importantly, there is a business here, it does provide the necessary services to its customers, but even at this low price per share, the stock remains expensive as hell.

Readers will note that this stock hit resistance at the (minimum) 23.6% Fibonacci retracement level at around $11.60 in early August. (My computer model doesn’t provide the 23.6% and 78.6% levels because they are a bit more advanced than the standard Fib levels, so when they matter I have to plot them on the chart.)

Going back before that, to April and May, these stocks started to consolidate after the long sell-off from September 2021 levels. This has resulted in a formation that looks like a “symmetrical triangle” or “closing pennant”. This type of chart pattern often results in a bullish breakout in one direction or the other. The basics are mixed. Technicals say this stock is almost ready to boogie. In which direction? I can’t say… but the risk/reward ratio at these prices is vastly improved despite the highly stretched valuation. That’s why my SU $10 portfolio still has that name in the bullpen.

My idea, instead of exposing the money to equity, would be to sit out for a few months and try to work some magic in the options market.

Business idea (minimum lots)

– Buy one PLTR call on January 20th at $7.50 for about $0.86.

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

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

Net Debit: $0.38.

Note: The idea here is to play the name up in a way that avoids risk. The trader partially subsidizes the purchase of the $7.50 call through sales, which both limit yield and expose the trader to $6 equity ($6.38 net basis).

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