Palantir is almost ready to boogie, but in what way? Try this trade

Palantir Technologies (PLTR) announced its third quarter financial results Monday morning. The results were seen as pedestrian at best.

Palantir was an old favorite of mine dating back to the very beginning of his life as a publicly traded company. First I was up, then I was down, and then I was down some more. When I was down 8%, I took my leave. Readers will remember my 8% rule. For the new kids, I try very hard to never let myself lose more than 8% on a position unless it happens when I’m sleeping. Part of risk management.

Well, since the stock’s peak in September 2021, the share price has fallen about 73%. I put PLTR in the “Stocks Under $10” bullpen a while ago. It’s still there and hasn’t earned a promotion to the actual portfolio yet.

For the three-month period 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 the consensus.

Operating income was $-62.191 million (-13%), while adjusted operating income was $81.25 million (+17%). Total net income came in at $-123,875 million. By far the lion’s share of the adjustment was made for stock-based compensation, which was $140.308 million. Adjusted EBITDA grew 18% to $87.192 million, while Adjusted Free Cash Flow improved 8% to $36.56 million.

Nuts bolts

– US sales increased 31% to $297 million.

– US government revenues increased by 23%.

– US commercial sales grew by 53%.

– The number of customers grew by 66%.

– US customer base grew 124% to 132.

– Total contract value closed of $1.3 billion.

– Total US contract value closed at $1.1 billion.

Outlook

For the current quarter, after taking into account a $5 million negative effect from foreign exchange, Palantir expects revenues of $503 million to $505 million. Excluding FX, the company would have expected $508 million to $510 million. Wall Street was generally around $506 million on this number. The company expects adjusted operating income of $78 million to $80 million.

For the full year 2022, after factoring in an additional $6 million negative effect from foreign exchange since last quarter, Palantir has reaffirmed its revenue forecast of $1.9 billion to $1.902 billion. Ex-FX, Palantir is said to have pushed revenue to $1,906 billion to $1,908 billion. Wall Street stood at $1.9 billion for this statistic. The company also raises its guidance for full year adjusted operating income from $341 million – $343 million to $384 million – $386 million.

Balance

Palantir closed the quarter with a net cash position of $2.489 billion, including current blocked cash and marketable securities, and current assets of $2.947 billion. Current liabilities amounted to $688.3M. This leaves the company with a whopping current ratio of 4.28.

The total assets add up to $3.319 billion. There are no intangible assets on the balance sheet. Total liabilities less equity is $932 million. This does not include an entry for non-current or current liabilities. Say one thing about Palantir, this is 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 that balance that I really admire. The fact is that the gross profit margin fell to 79.7% from 81.7% for the year ago comp. The truth is, GAAP operating margin hasn’t printed positive yet. The truth is, the free cash flow margin is down to 7.7% from 30.4% a year ago. The fact is, the stock is still trading at 162 times forward-looking earnings.

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

Readers will note that in early August this stock met resistance at the (minimum) Fibonacci retracement level of 23.6% around $11.60. (My computer model doesn’t offer the 23.6% and 78.6% levels, as they are a bit more advanced than the standard Fib levels, so if they matter, I have to draw them on the map.)

Really going back before that, to April and May, these stocks started to consolidate after the long sell-off from the September 2021 levels. This has led to what appears to be 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 technical data says this stock is almost ready to boogie. In which direction? I can’t say… but the risk/reward at these prices has improved significantly despite the very stretched valuation. This is why my SU$10 portfolio still has this name in the bullpen.

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

trading idea (minimum lots)

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

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

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

Net Debit: $0.38.

Remark: The idea here is to bring out the name in a risk-averse way. The trader partially subsidizes the call’s purchase of $7.50 through sales that both limit profitability and expose the trader to equity capital of $6 (a net basis of $6.38).

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