Hey guys, it's sasha palantir is one of the most interesting investing options on the market, the company's crazy growth, divided opinions about their business model and ethics, and the fact that they are technically still losing money at the moment makes it one of the most difficult stocks Out there to value so naturally, i thought that i'd walk you through my valuation of palantir in this video and then give you some reasons behind that valuation. The current share prices, i'm recording this video is just at about 22 dollars. It's falling quite a lot recently and in my view, that is incredibly low. Now i have a target price of 81 dollars for palantir, and that gives me about 268 upside, which is why i have recently added considerably to my palantir position.

I am going to show you why i have set my target price at 81 dollars, but remember this is just my opinion. I am a random guy on youtube and you need to make sure that you do your own research and do your own numbers, because random guys on youtube are very often wrong and have absolutely no idea what they're talking about so here's a big issue with palantir. They are currently a loss-making business, so using traditional multipliers or any other similar method just doesn't work here. There will be some investing channels out there.

That will tell you that the company is worth nothing the worth zero because they aren't turning a profit. Remember that tip that i just gave you about listening to random guys on youtube. So how do you go and value a company like palantir? Well, i went and put together a relatively basic valuation model. So let me walk you through it and explain my thinking.

I show you some of the highlights here, but not all the numbers are actually necessary or relevant. This is just to sense check some of the assumptions and so that you can understand a little bit more about why the free cash flow numbers look like they do so that they make a little bit more sense. Now, in 2020, palantir earned 1.1 billion dollars in revenue and in q1 2021 that revenue figure was 341 million. So 2021 is definitely looking like a healthy jump up in revenue, which is what you'd expect from a business that is growing.

This fast q1 grew by 49 percent year on year and is looking like q2 onwards will also look good because the new contracts apparently been announcing over the last few months. I expect that that rate is going to continue through the year and maybe actually accelerate towards the end of the year. Here is why, when palantir published their annual report for 2020, there was one figure in there that got me really excited a tech company that has 1.1 billion dollars worth of total revenue. Had a total outstanding deal value of 2.8 billion dollars.

That is the value of the contracts that parentheart had signed at that point had agreed but haven't actually been paid yet haven't completed the work and haven't collected money, so they already had almost three times their annual revenue in the pipeline waiting to be paid. But then, only three months later, the end of q1 that number grew to 5.4 billion, with about 2.6 billion of that coming from idiq awards, which are the contracts for big government projects. The small print here says that these contracts carry a higher risk, because the funding for these is not guaranteed. It is not set in stone, it requires ongoing budgetary government approval, but we're talking government bodies and the military and other entities like that.

Switching over to using palantir systems, the funding for these may not strictly speaking legally be guaranteed because it has to be approved every single year and so on. But when your core military and government functions fundamentally depend on those systems, i am taking the lack of a guarantee here as a somewhat technical moot point. So anyway, i am seeing a company whose pipeline grew by 93 percent in the last quarter and every week huge new contracts are being announced and then there's this. In q1, 2021 palantir's u.s government revenue grew by 83 percent and their u.s commercial revenue grew by 72.

But the total revenue only grew by 49 percent. So if you do the maths a lot of palantirs big earners from before from 2019 and before that, have not actually grown as much and that might not come as much of a surprise. Palantir has been growing massively with airlines, aircraft manufacturers, general transportation, oil and other industries that all got hit very hard over the last 18 months and naturally, the revenues from those sectors have stagnated, but as the world begins reopening through the second half of 2021 and into 2022, i see those numbers picking up as well, and so i assumed a 55 rate of growth on revenue in 2021, followed by a huge 70 rate of growth in 2022, and some people might say that is ridiculous. That is a really stupid assumption.

But given the pipeline is growing far faster than these numbers that i'm putting in here, i actually think these are pretty reasonable, because that pipeline remember has an average term of 3.7 years, so this is a pipeline that is now setting work for 2022 in 2023. Now that puts the total revenue over the next two years in my model, at 4.6 billion dollars, which is 800 million dollars less than the value of their signed contracts. As of three months ago now, palantir have an internal expectation of growing by at least 30 every single year. This is their internal target and every quarter they report that they are.

You know meeting the general line in the sand, but based on what they are building based on the stickiness of their business model, because the customers that they acquire tend to stick around for a really long time, because those systems are so good and so difficult for Them to ever make the decision to actually move away from them. I expect that that number is going to far exceed the 30 rate of growth i have put in 50 for years 3, 4 and 5. Here. I've then assumed a steady rate of growth in the adjusted operating margin and tax payments starting from 2024, which is, i think, when they're gon na begin posting uh, decent profits, um, and that gets me to my free cash flow.

Then i also have a perpetual rate of growth set to five percent that i think is higher than maybe what some other people would expect from a general dcf model, but we're talking a hyper growth rate of 50 for that company up until then. But to me that just makes a lot of sense. I also have a free cash flow multiplier of 25 and five years time, and that makes sense to me. For the same reason, always some people will say that it's way too high and way ambitious, but for a company that's growing at that rate.

At that point i actually think that's quite sensible. I'm also assuming 2 billion shares here, just over 2 billion shares and you might think well, hang on that's more than the currency circulation, and that is because i'm adding the unexercised options to the current total of shares in circulation. Just so that i'm on the conservative side and presuming that all of them going to be exercised and that's the current sort of real number of shares that are going to be out there, but anyway using those numbers. I get a target share price of around 50 to 60 dollars and you might be wondering, hang on if you only got to 50 to 60 dollars.

How did you come up with 81, which is what you told us a few minutes ago now here's the clue! If you look at the present value of the cat free cash flows, that present value is rising quite fast in 2026, despite the cumulative discounting rate beginning to be quite large at that point, and this is a problem because we are expecting a flat 5 cent growth From that point in the model, or just a 25 times multiplier, and that is for a company that is still at that point in this model growing through a rapid period of growth. So if i was to go and extrapolate this model by, let's say adding another five years and keeping the rest of the assumptions roughly the same and then gradually reducing the growth over those those five years after the the current model to decay to something like 15. In the uh in the out years and reduce the perpetual growth factor to four percent as well just to be on the conservative side, then the numbers begin. Looking a bit more interesting.

Now i've set the free cash flow, multiple now to 15, which is a lot more conservative, because i'm assuming that the rate of growth will slow down just being conservative here now. My valuation at this point says between 61 and 86 and given the nature of their business and the robustness and the longevity of their revenue model, i will actually aim at the higher end of that spectrum. So i've gone with a target price of 81. Now you might be wondering why is it 81 and not 80, and there is a very solid reason for that.

It is so that you would wonder what that one dollar is doing there and then, because of that intrigue related to that one dollar. You might be interested in the rest of the valuation watch, the video maybe enjoy it and maybe then smash the like button for the youtube algorithm. But anyway, valentina shares have recently dipped and i have, as a result, increased my long position in them. I hope you guys found this useful.

Thank you so much for watching. I really really appreciate it and, as always i'll see you guys later, you.