Is the newest member of the S&P 500 a buy?

Key points

• Palantir stock jumped more than 13% on Monday.

• The stock was soaring on the news that it was added to the S&P 500.

• The stock is up nearly 100% YTD. Is it a buy?

This AI stock is soaring on the news that it has been added to the S&P 500. Is it a buy?

Palantir Technologies (NASDAQ: PLTR) stock was soaring on Monday, making it one of the top gainers on the day, up more than 13% as of mid-afternoon, Eastern time.

Palantir stock has been on fire this year, up roughly 100% year-to-date, and it got another jolt Monday on the news that it has been included in the S&P 500.

Is the newest member of the S&P 500 a buy? Let’s take a look.

Palantir stock price has doubled this year

Palantir is another stock that has benefitted from the AI boom. In a nutshell, the company makes software that allows customers, both commercial and government, to collect and analyze large amounts of data and develop generative AI models to improve decision making and facilitate other functions.

In the latest shareholder letter, Palantir CEO Alex Karp said the company’s AIP, or Artificial Intelligence Platform, has transformed its business. Its AIP has been a major contributor to the 55% revenue increase Palantir saw in its U.S. commercial business in the second quarter. Overall, revenue grew 27% year over year to $678 million.

On Monday, Palantir inked a five-year deal with BP, the oil and gas producer, for its AIP platform, the latest in a series of big wins.  

“The persistent and unbridled demand for our software, for an effective enterprise platform that makes artificial intelligence capabilities useful to large institutions, shows no sign of relenting,” Karp said in the Q2 shareholder letter.

That growth has led to consistent profitability over the last two years, including record net income of $134 million, or 6 cents per share, in Q2.

It has also led to huge gains in its share price, as Palantir stock jumped 167% in 2023 and is up roughly 100% so far in 2024, trading at just over $34 per share.

Why inclusion in the S&P 500 matters

With a market cap of about $76 billion, Palantir was added to the S&P 500 last week, along with Dell (NYSE: DELL) and Erie Indemnity (NASDAQ: ERIE). On September 23, they will replace American Airlines (NYSE: AAL), Etsy (NASDAQ: ETSY), and Bio-Rad Laboratories (NYSE: BIO). The changes ensure that the index is more representative of the requirements that make up the large-cap market space.

To be included in the S&P 500, a stock obviously must meet the market cap requirements, but there are other criteria to meet as well. One of them is profitability, as S&P 500 firms must be profitable for at least four quarters. So, it not only raises the profile of the stock; it also shows that the company is reliably profitable.

But perhaps the most important perk is that inclusion in the S&P 500 means the stock will now get assets from the many exchange-traded funds (ETFs) that invest in the S&P 500.

Is Palantir stock a buy?

Investors were pouring into Palantir for the reasons outlined above — its revenue growth, profitability, the growth potential of AI, and the raised profile from inclusion in the S&P 500.

However, the rally also shoots up the share price of a stock that is already wildly overvalued, with a P/E ratio of 178 and a forward P/E of 78. It is hard to sustain that level of growth, even for a company as successful as Palantir.

That may be why Wall Street analysts have a median price target of $28 per share, which would be down from the current $34 per share price. That target may adjust after the S&P 500 news, but still, it suggests that the price will likely flatten out a bit.

Investors who have been on the Palantir express the past couple years have been thrilled with the results, but for new investors, it may not be the opportune time to get on board due to its high valuation. But Palantir stock, at the right entry price, does look like a good long term investment. But the price right now looks too high.