Palantir's S&P 500 Inclusion: A Buy Signal or a Sell the News Opportunity?

The S&P 500 Index ($SPX) is more than just a list of 500 (or so) U.S. companies. It is a barometer that reflects 80% of the nation’s stock market value. For companies, getting added to the benchmark index means an instant boost as tracking funds and indices rush to buy shares, driving up demand and price. Palantir Technologies (PLTR) just scored that milestone, and is set to join the S&P 500 on Sept. 23 as part of a quarterly rebalancing.

This move marks a new chapter for Palantir, validating its rise in artificial intelligence (AI) and data analytics. Investors have reason to celebrate, with the stock surging triple digits in 2024 - and up 17% just this week alone, fueled by growing retail enthusiasm and bullish analyst forecasts.

But is now the time to jump on the Palantir bandwagon, or lock in gains as the stock revisits its previous highs? To answer that, let’s take a closer look at the firm’s financials, growth catalysts, and the latest Wall Street views. 

About Palantir Stock

Headquartered in Denver, software company Palantir Technologies (PLTR) is a prominent, if not particularly transparent, leader in the realm of big data analytics. The company has revolutionized data utilization for governments, defense agencies, and commercial enterprises.

Through its advanced AI-driven platforms, Gotham and Foundry, Palantir enables users to navigate and extract actionable insights from extensive and intricate datasets. With a market cap of $77.4 billion, Palantir remains at the cutting edge of data integration and analysis, significantly contributing to improved security operations and strategic decision-making across various sectors.

Shares of Palantir have made headlines this year, skyrocketing 107.3% on a YTD basis - a sharp contrast to the S&P 500 Index’s 17.9% return and the S&P 500 Information Technology Sector’s ($SRIT)26.2% gains. PLTR set a new multi-year high of $36.01 to close last week, touching its highest price since February 2021. The stock’s all-time high of $45 was touched briefly in January 2021. 

Palantir trades at 98.34x forward adjusted earnings, which looks reasonable only in comparison to its own historically inflated longer-term average valuations. The stock also looks expensive in terms of price/cash flow and price/sales, which stand much higher than PLTR’s industry peers at 89.28x and 28.34x, respectively.

Palantir Beats Q2 Estimates

Palantir unveiled its Q2 earnings results after the close on Aug. 5, and the stock rallied over 10% the next day. Revenue spiked 27% year over year to $678.1 million, beating Wall Street's estimates by 3.9%. Adjusted EPS rose 80% to $0.09, also topping expectations.

Palantir’s Artificial Intelligence Platform (AIP) raked in 54.7% of total revenue in Q2, representing 23% annual growth. While government contracts keep cash flowing, the company’s reliance on a few big players poses a risk. To mitigate this, Palantir is charging into the commercial sector with its Foundry platform, which is making waves in healthcare, finance, and manufacturing. Commercial revenue surged 33%, and Palantir’s U.S. commercial customer base shot up 83%, now standing strong at 295 clients.

Palantir exited Q2 with a solid $1 billion in total contract value, flexing its power to secure new deals and expand partnerships through AI-powered solutions. Plus, its liquidity is robust, boasting $4 billion in cash and cash equivalents, and $149 million in adjusted free cash flow (FCF) for Q2.

For Q3, management estimates revenue between $697 million and $701 million, with adjusted operating income anticipated to range between $233 million and $237 million. Looking ahead to fiscal 2024, Palantir raised its revenue guidance, which is now projected between $2.742 billion and $2.75 billion, while U.S. commercial revenue is expected to grow by at least 47% to exceed $672 million. Adjusted FCF is estimated between $800 million and $1 billion.

Analysts tracking Palantir predict EPS of $0.19 in fiscal 2024, up 137.5% annually, with the bottom line projected to surge by another 36.8% to $0.26 in fiscal 2025.

Should Investors Buy or Sell the S&P 500 News?

Palantir just hit a major milestone, with news of its S&P 500 inclusion sending its stock soaring. By meeting the index’s strict profitability and market cap standards, Palantir proves it is a player worth watching.

But in the wake of the stock’s sharp rise, short-term gains might be limited - particularly since the SPX-related surge seems unlikely to soothe any concerns about Palantir’s consistently steep valuation. And while the headwinds may be company-specific, the recent price action in Super Micro Computer (SMCI) following its addition to the S&P 500 Index also serves as a potential cautionary tale for high-flying AI stocks.

However, some analysts think Palantir is just getting started.

What Do Analysts Expect for Palantir Stock?

Bank of America’s Mariana Perez is bullish on Palantir, raising her target price to $50 - the new Street-high. In a note on Sept. 10, she called Palantir's inclusion in the S&P 500 a "watershed moment" that could push institutional investors to reassess its potential.

Perez believes the company’s misunderstood model and solid margins give it pricing power, especially with its AI capabilities and strong customer base. Palantir's unique approach of working closely with clients to create tailored solutions further strengthens its long-term growth prospects, according to BofA.

Wedbush analyst Dan Ives, who rates PLTR "Outperform" with a $38 price target, said that “getting added to the S&P 500 Index is an important moment in the Palantir story that we believe marks a new era of enterprise growth and profitability over the next few years.” 

Most analysts don’t share the same enthusiasm for PLTR stock. Citi analysts led by Tyler Radke are cautious about Palantir, warning that it’s “one of the most expensive names in software,” even as the company is in the early stage of AIP monetization. Citi maintains a “Neutral” rating and a $30 price target on the new S&P 500 stock.

Overall, Wall Street views PLTR as a “Hold.” Among the 15 analysts covering the stock, two recommend a “Strong Buy,” one suggests a “Moderate Buy,” five analysts advise a “Hold,” one rates it as a “Moderate Sell,” and six firmly back a “Strong Sell” rating.

Palantir closed last week at $35.59, representing a healthy premium to analysts’ average 12-month price target of $25.69.