Today an unusual level of put options activity in Palantir Technologies (PLTR) stock shows that speculators expect near-term volatility in PLTR stock. The puts are just in-the-money (ITM) and expire within 30 days. As a result, some of this unusual activity may be due to income plays from short-put traders.
For example, PLTR stock is trading around $16.14 in midday trading on Wednesday, Aug. 30. The unusual PLTR put options activity, as seen in Barchart’s Unusual Stock Options Activity Report, is at the $16.50 strike price. These puts will expire on Sept. 29, which is 30 days from today.
The report shows that over 5,000 put contracts traded for $1.27 per put option at this $16.50 strike price, which is just $0.36 in the money (i.e., $16.50 – $16.14). That means that the intrinsic value of those puts is 36 cents, vs. the price paid by long owners of the puts of $1.27.
In other words, PLTR stock will have to fall by $1.27 from the strike price, or $15.23 (i.e., $16.50-$1.27), for a breakeven level for purchasers of these puts. That means PLTR stock has to decline by 5.63% from today’s price of $16.14 before owners of the puts begin to make money.
On the other hand, those shorting those puts might be hoping that the stock treads water or rises over the next 30 days. So, by shorting these puts for $1.27 per put contract, they can actually make money as long as PLTR stays over $15.23.
Let’s say the stock closes at $15.50 on Sept. 29. Even though their puts will be exercised they can then sell the shares in the market at least at breakeven or even a profit since they will collect $15.50 from the sale of the shares exercised, plus also the $1.27 immediately received from shorting the puts. That amounts to $16.77, vs. the $16.50 cost of the exercise of the puts.
That 27 cents profit (i.e., $16.77-$16.50) works out to a 1.64% monthly profit (i.e., $0.27/$16.50). On an annualized basis this works out to a return of almost 20% (1.64% x 12 =19.68%).
Much of this activity falls on where speculators feel that PLTR stock will move within the next 30 days. Let’s look at the earnings and valuation for PLTR stock.
Palantir’s Earnings and Valuation
Palantir reported its earnings for Q2 on Aug. 7. Its results showed that revenue shot up 13% YoY to $533 million and its adj. income from operations rose by 25% to $135 million. That means its adj. operating income margin hit 25% of revenue, up from 23% a year ago.
The same positive growth occurred with its adjusted free cash flow (FCF). That measures all the cash flows of the company, including capex spending, and net outflows from working capital. This is important since if it is positive it shows that the company is no longer burning through cash.
For example, Palantir’s adj. FCF was $96 million, up an astounding 57.6% from a year ago. Moreover, even more importantly, its adj. FCF margin grew to 18% of revenue, up from 13%.
That means that 18% of every sales dollar goes straight to the cash balance. It is therefore “free” to be spent on buybacks, dividends, acquisitions, and debt paydowns.
The bottom line is therefore that PLTR is very profitable on an earnings and cash flow basis.
Where This Leaves PLTR Stock
The issue with investors is that PLTR stock already incorporated much of this good news. For example, PLTR stock now has a huge $34.79 billion market capitalization.
Based on analysts’ earnings forecasts, the price represents a forward P/E multiple of 67x for 2023 and 58x based on 2024 earnings forecasts.
Even based on free cash flow, the valuation appears steep. For example, if we use revenue forecasts of $2.63 billion for 2024, at an 18% FCF margin, free cash flow would be $473 million. Even with a 20% margin for 2024, FCF at best would reach $526 million (i.e., 0.20 x $2,630 billion).
This means that at a $34.79 billion market cap PLTR stock trades for 66 times expected FCF for 2024. This is also the same as a 1.5% FCF yield (i.e., 1/66x). Typically tech stocks like this trade for no more than a 3.0% or 3.33% FCF yield (i.e., 30x to 33x FCF).
In other words, PLTR stock could be up to 50% overvalued if it were to fall from 66x FCF to 33x FCF.
The bottom line here may be that long holders of these put options may have the edge over the short put traders. This is because PLTR stock is at risk of coming under pressure due to its high valuation.
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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.