Palantir is almost ready for Boogie, but in what way?  Try this trade

Palantir is almost ready for Boogie, but in what way? Try this trade

On Monday morning, Palantir Technologies ( PLTR ) released the company’s third quarter financial results. The results were considered 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 was down, and then I fell some more. Once I was down 8%, I got my license. Readers will recall my 8% rule. For the new guys, I try really hard not to let myself lose more than 8% in one position, unless it happens while I’m sleeping. Part of risk management.

Well, since the stock peaked in September 2021, the stock price has fallen about 73%. I placed PLTR in the “Stocks Under $10” bullpen a while back. He’s still there, having yet to earn a promotion to the real portfolio.

For the three months ended September 30, Palantir posted adjusted EPS of $0.01 (GAAP EPS: $0.06) on revenue of $477.88 million. growth of 21.9% and beat consensus.

Operating income came in at -$62.191M (-13%) as adjusted operating income came in at $81.25M (+17%). Total net income reached -$123.875 million. So far, the lion’s share of the adjustment was for stock-based compensation, which totaled $140.308 million. Adjusted EBITDA increased 18% to $87.192 million, while adjusted free cash flow improved 8% to $36.56 million.

Nuts & Bolts

– US revenue increased 31% to $297 million.

– US government revenue increased by 23%.

– US trade revenue increased by 53%.

– The number of customers increased by 66%.

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

– Total contract value $1.3 billion.

– Total US contract value closed $1.1 billion.

Point of view

For the current quarter, after accounting for a $5 million negative impact from foreign exchange, Palantir expects to generate revenue of $503 million to $505 million. Excluding FX, the company would expect $508 million to $510 million. Wall Street was generally about $506 million in that number. The company expects to generate adjusted income from operations of $78 million to $80 million.

For the full year 2022, after accounting for the additional negative impact of $6 million from foreign exchange from last quarter, Palantir reaffirmed its revenue guidance of $1.9 billion to $1.902 billion. Ex-FX, Palantir would have guided for revenue of $1.906B to $1.908B. Wall Street was at $1.9 billion for that metric. The company is also raising its outlook for adjusted operating income for the full year from $341 million-$343 million to $384 million-$386 million.

Balance sheet

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. This leaves the company with a whopping current ratio of 4.28.

Total assets amount to $3.319 billion. There are no intangible assets required on the balance sheet. Total liabilities minus equity amount to $932 million. This does not include registration for long-term or short-term debt. Say one thing about Palantir, this is one of the highest quality balance sheets you and I will ever come across when analyzing stocks.

My thoughts

I want to rave about PLTR. Really, especially with this balance sheet which I really admire. The fact is that the gross profit margin decreased to 79.7% from 81.7% for the corresponding year last 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. Fact is, the stock still trades at 162 times forward earnings.

Finally, the bottom line is that there is a business here, it provides a necessary service to its customers, but even at this low price per share, the stock remains very expensive.

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 does not provide the 23.6% and 78.6% levels as they are a little more advanced than standard Fib levels, so when they matter I have to plot them on the chart.)

Actually going back before that, in April and May, these stocks started to consolidate after the long sell off from September 2021 levels. This led to what looks like a “symmetrical triangle” or “flag closing” formation. This type of chart pattern often leads to violent breakouts in one direction or the other. The fundamentals are mixed. Technicians say this stock is almost ready to boogie. Where to? I can’t say… but the risk/reward at these prices is much improved despite the very tight valuation. This is why my SU $10 portfolio still has that name in the bullpen.

My idea, instead of putting in the dough for a share of equity, would be to sit out a few months and try to do some magic in the options market.

Business idea (minimum batches)

– Buy a January 20 $7.50 PLTR call for about $0.86.

– Sell a January 20 $10 PLTR call for about $0.20.

– Sell a January 20th $6 PLTR for about $0.28.

Net charge: $0.38.

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

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