**Palantir** (NYSE:**PLTR**) reported stellar earnings on May 11 for the first quarter, showing massive revenue and free-cash-flow growth. I predicted that Palantir, the software company for the intelligence community, would turn free-cash-flow positive late last year. Now it has come true. The company’s FCF will continue to spike higher with revenue growth. And that will push PLTR stock much higher.

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Here is what happened.

Palantir reported that revenue rose 49% to $341 million. But here is what is astounding. Adjusted free cash flow came in at $151 million, up $441 million year-over-year. This also represents a very large portion (44.3%) of revenue.

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As a result, we can use this to value the company going forward.

### Using FCF to Value Palantir

The 44.3% adjusted FCF margin can be applied to estimates for 2021 and 2021 revenue to derive FCF estimates. For example, analysts polled by *Seeking Alpha* forecast that revenue will be $1.48 billion in 2021, up 35% from $1.093 billion last year. So using a 40% margin (slightly lower than Q1 to be conservative) adjusted FCF will hit $592 million this year.

And since revenue is forecast to climb 29% next year to $1.91 billion, adjusted FCF could be $764 million by the end of 2022. We can use this to value PLTR stock.

For example, using a 1% FCF yield measure, PLTR stock is worth $76.4 billion. This can be seen by dividing $764 million in the 2022 forecast adjusted FCF by 1%. This represents a potential gain of 53.7% over Palantir’s present $49.7 billion market value That makes it worth $40.82 per share (i.e., 53.9% above its price today $26.53).

Another way to value PLTR stock is to use a 1.5% FCF yield. This would make Palantir worth $50.933 billion, and the target price for PLTR stock would be 5% higher at $27.85 per share.

So, in effect, Palantir is worth somewhere between 5% and 53.9% higher — let’s call it 29.5% higher (about one-third). So that means one can reasonably expect PLTR stock to be at least 30% higher within the next year, or $34.34 per share. That is based on the midpoint between a 1% and 1.5% FCF yield. But it could also be worth as much as 53.9% more at $40.82 per share using a 1.0% FCF yield.

### What To Do With PLTR Stock

Analysts don’t agree with me. For example, Yahoo! Finance reports that the average of seven analysts’ price targets is $22.43, 15.5% below the current price. In addition, *TipRanks.com* reports that eight analysts have an average target of $22, or 17.1% below the price on June 24. *Marketbeat* says $20.75, or 21.8% below today.

So, on average analysts say PLTR is worth 20% below today’s price. But my view is that the stock is worth at least 29.5% higher. Who is right?

### Probability and Expected Returns

As you may surmise from reading my articles, I try to be objective about this by using probability analysis. For example, I put together three scenarios and weight them differently. I weigh the possibility that analysts are right by 50%, and that I am right by 30%. The third scenario for 20% involves a market-based return of, say, 10% over the next year. All three scenarios add up to 100% of the likely outcomes.

So here is how that works out. In scenario one, analysts’ average expectation of a 20% drop is multiplied by the probability weight of 50%. That produces an expected return (ER) of -10% (i.e., 0.50 x 0.2). The second scenario, where I’m right, is weighted by 30%. That results in an ER of +8.85% (i.e., 0.30 x 0.295). The third scenario results in an ER of +2.0%. Therefore, the total ER adds up to 1.1% (i.e., 8.85% +2% -9.75%).

This means that even if there is a 50% chance analysts are right, there is still a positive expected return for the stock. Palantir would be undervalued by at least 1.1%. But I have also shown that PLTR stock could be worth as much as 54% more at $40.82 per share.

*On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article.* *The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com *Publishing Guidelines*.*

*Mark Hake writes about personal finance on ***mrhake.medium.com*** and runs the ***Total Yield Value Guide***which you can review **here**.*

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