Stock Market

Palantir Investors Can Profit From Its Lucrative Side Bets

Guardian Fund, a Dutch-based investment fund, had good things to say about Palantir Technologies (NYSE:PLTR) in its first-quarter 2021 report. The fund believes Palantir is “one of the more important global software companies.” Additionally, it noted the company has invested more than $200 million in eight companies that could pay big dividends in the future. PLTR stock may stand to benefit from both of these factors.

Source: Sundry Photography /

The investment fund already has several companies in its portfolio that made successful side bets. For example, who can forget the $1.3 billion unrealized gains Shopify (NYSE:SHOP) reported in Q1 2021 from its partnership and investment in Affirm Holdings (NASDAQ:AFRM)? The buy now, pay later platform went public on Jan. 12 at $49. Its price rose 98.4% on its first day of trading, but AFRM stock has since given back most of those gains. 

It will be interesting to see how long Shopify will hang on to its shares in Affirm. In the meantime, let’s consider what Palantir’s side bets might mean for PLTR stock in the future.

Free Cash Flow and PLTR Stock

The last time I wrote about Palantir was in early July. While I had trouble with the amount of money it was paying CEO and co-founder Alex Karp, I didn’t think there was a lot of downside to PLTR stock. Thus, I felt it made a good momentum play. 

But like clockwork, Palantir’s momentum came to an abrupt end. Its stock price fell more than 10% since my article. However, between its free cash flow (FCF) margin and side bets, I think a buy in the high teens or low $20s is a smart bet for aggressive investors. 

Page three of the Guardian Fund’s letter showed that Palantir had 49% revenue growth and an FCF margin of 42% in Q1 2021. Those are very healthy margins. 

Palantir’s adjusted FCF went from a loss of $290.2 million to $151 million in the first quarter. If it maintains revenue growth in the 40-percent range, investors can expect its FCF to explode. That will make additional side bets a real possibility for the company. 

As for the side bets themselves, let’s consider them in totality. 

Side Bets Make PLTR Stock an Interesting Play

In early June, Palantir was in an investor group that committed $230 million to a private investment in public equity (PIPE). The move was part of the $4.2 billion special purpose acquisition company (SPAC) merger between Alkuri Global Acquisition Corp. (NASDAQ:KURI) and UK telehealth company, Babylon Health

As of the Babylon Health merger announcement, Palantir has made six SPAC investments. That includes a $41 million investment in Lilium, which has developed an air taxi that can take off and land vertically while carrying seven passengers. 

“‘We’re seeing an opportunity to back really good management teams with big visions,’ said Kevin Kawasaki, Palantir’s head of business development. The company can partner and ‘allow them to have our data operating systems platform that we’ve put 15 years and billions of R&D dollars into,’ he said,” CNBC reported on June 4. 

So Palantir isn’t just investing in these companies. It’s actively developing additional business from these investments and their contacts. It’s a smart networking play for a company that finished the first quarter with $2.3 billion in cash on its balance sheet. 

Assuming it continues to grow its FCF, there will be plenty of cash available to make more investments. This can continue even if Palantir doesn’t have as much cash on its balance sheet in the future. 

Consider any gains from these investments to be icing on the cake. 

The Bottom Line on PLTR Stock

There are currently 10 analysts covering PLTR stock with ratings all over the map — two buys, five holds and three outright sells. They have median and average price targets of $20 and $22.41, respectively. 

That leaves little on the upside, so say the analysts. 

The big knock against Palantir has always been that it relies too heavily on its government business. For example, in Q1 2021, the company’s government revenue grew by 76% and accounted for 61% of its $341.2 million in overall revenue. In Q1 2020, its government revenue accounted for 52% of overall revenue.

That could be a concern. Or, as the Guardian Fund’s Q1 2021 letter stated, it could be an opportunity.

“Government institutions have to partner with enterprises such as Palantir to become digital-native. The public sector will always struggle to attract the most talented engineers as compensations cannot be justified with tax money and therefore this must be a partnership with specialized private enterprises,” page four stated. 

“This is a great opportunity for Palantir especially as it has already shown to be capable of working with demanding and complex public institutions entrusting it to work on the most critical and sensitive matters.”

I choose to believe it’s an opportunity. 

I wouldn’t personally invest because of my distaste for excessive CEO compensation. But the side bets can provide an equity kicker similar to what you might get from debt financing. 

If and when its price reaches the teens, PLTR stock will be an excellent buy.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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