Contemplating Investing in Palantir Shares Prior to June 21?
Reaching the prestigious milestone of being added to the S&P 500 is a significant achievement for any public company. This stock index serves as a reliable indicator of the market's overall health, and inclusion in this exclusive club signifies a company's dominance within its industry.
However, businesses can experience fluctuations in their results, which can influence trading activity and valuations. Fortunately, the S&P 500 index is rebalanced every quarter, with the next rebalancing scheduled for June 21.
During this period, several potential candidates are evaluated for inclusion, including AI company, Palantir Technologies (PLTR, up 6.25%). Let's discuss why Palantir is a contender and if buying shares before the rebalancing is a wise move.
Palantir has been here before
To be considered for the S&P 500, companies must meet several criteria, such as market cap, IPO timing, trading volume, and more.
One of the most challenging criteria for S&P inclusion is profitability. To be selected, a company must show positive earnings for the last four quarters. Notably, only the most recent quarter's net income needs to be positive.
Palantir was deemed eligible for the S&P 500 following its third-quarter earnings report in 2023. Since then, the company has consistently reported positive earnings. As of March 31, Palantir has now posted six consecutive quarters of profitability according to generally accepted accounting principles (GAAP).
Since Palantir became eligible for the S&P 500 two quarters ago, companies such as Super Micro Computer, Uber Technologies, Deckers Outdoor, and Jabil were added to the index.
Will Palantir make the cut on June 21?
Although it's uncertain if Palantir will be chosen for the S&P 500 on June 21, it's generally not a cause for excessive concern. The absence of a clear reason for Palantir's exclusion so far suggests that current market trends may influence its inclusion.
For almost two decades, Palantir posted substantial operating losses. Although the company proved it could sell software to large enterprises, there was uncertainty about whether Palantir would ever achieve sustained profits or continue to invest in growth and burn money.
However, over the past year, applications in generative AI have emerged as a substantial growth driver for tech businesses. Palantir has benefited from this trend, with its revenue, operating margins, and free cash flow all on the rise.
Should you invest in Palantir stock now?
With a price-to-sales (P/S) ratio of 20.9, Palantir is trading at a premium compared to many of its SaaS peers.
Despite Palantir's premium valuation, I'm not deterred. The company's consistency in profits offers it financial flexibility, which it can use to innovate and distinguish itself from competitors.
Additionally, the chart suggests that Palantir might be an attractive buy right now. Despite its high P/S multiple for a growth stock, it has noticeably decreased from earlier this year. This is especially noteworthy, considering Palantir reported another strong performance in its first-quarter earnings report, marked by further revenue and profit growth.
In conclusion, while S&P 500 inclusion is commendable, I wouldn't base a stock purchase on that achievement alone. Investing in Palantir should be driven by conviction in AI, big data analytics, and the company's demonstrated ability to perform at a high level.
Currently, I view this as a chance to buy the dip in Palantir stock. Given the secular tailwinds propelling AI, Palantir appears well-positioned for robust, sustained growth. For these reasons, I believe the company's ability to maintain its profit generation in the long run remains promising.
After demonstrating six consecutive quarters of profitability according to GAAP, Palantir Technologies is a strong contender for inclusion in the S&P 500. Regardless of its inclusion in the index, the company's consistent positive earnings and growth in applications of generative AI make it an attractive investment opportunity for those interested in AI and big data analytics.
Investors looking to capitalize on Palantir's potential growth might consider buying the dip in its stock price, as its premium valuation may have decreased recently, despite strong first-quarter earnings reports. This strategic investment decision is driven by conviction in the long-term growth prospects of AI and Palantir's demonstrated ability to deliver strong financial results.
