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.

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.

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.