Palantir Stock Will Join the S&P 500 in September. History Says It Could Soar Afterward.

The S&P 500 (SNPINDEX:$SPX) index measures the performance of 500 U.S. companies that cover about 80% of domestic equities by market value. The index is generally considered the best barometer for the entire U.S. stock market.

Palantir Technologies (NYSE:PLTR) will join the S&P 500 on Monday, Sept. 23, as part of the index's quarterly rebalancing. Also joining the index are Dell Technologies and Erie Indemnity. Those three companies will replace Etsy, American Airlines, and Bio-Rad Laboratories.

Palantir stock has advanced 124% over the past year amid widespread interest in artificial intelligence. And history says the stock could move even higher after the company joins the S&P 500 later this month.

History says Palantir stock could soar after its inclusion in the S&P 500

Since 2019, a total of 93 companies have been added to the S&P 500. Of those companies, 76 have been members of the index for at least a year. Here's how those stocks performed during their first 12 months post inclusion:

• Average return: 12%
• Median return: 10%

The figures change slightly if we go further back. Since 2014, a total of 178 companies have been added to the S&P 500. Of those companies, 161 have been members of the index for at least a year. Here's how those stocks performed during their first 12 months post inclusion:

• Average return: 13%
• Median return: 12%

In short, history says Palantir will achieve double-digit returns between 10% and 13% over the 12-month period following its inclusion in the S&P 500.

However, investors should bear in mind that every company is different, so generalizing about how new S&P 500 components will perform is unreliable. Moreover, joining the index has zero impact on fundamental financial metrics like revenue and earnings. A study published in 2011 by the Federal Reserve Bank of New York concluded that "index inclusion has no permanent effect on value."

To that end, whether Palantir stock goes up or down after joining the S&P 500 depends on the company's financial results and what investors are willing to pay in terms of valuation.

Palantir is a leader in artificial intelligence and machine learning

Palantir specializes in data analytics. Its Foundry and Gotham platforms let businesses collect data, develop machine learning models, and integrate those digital assets into an ontology. The ontology connects data and models to real-world decisions, such that users can surface insights through analytical applications to improve business outcomes. The company says its "key differentiator is a software architecture which revolves around the Palantir ontology."

Last year, Palantir launched a new product called Artificial Intelligence Platform (AIP), which adds support for large language models and generative artificial intelligence (AI) to Foundry and Gotham. The company also revamped its go-to-market strategy around AIP by introducing bootcamps, interactive workshops that help customers develop relevant use cases within five days.

In August, Forrester Research recognized Palantir as a leader in artificial intelligence and machine learning platforms. Palantir received the highest score for its current product offering, but competitors Alphabet's Google and C3.ai scored higher in terms of product development strategy.

Palantir reported encouraging financial results in the second quarter, beating estimates on the top and bottom lines. Sales increased 27% to $678 million, marking the fifth straight sequential acceleration, and non-GAAP earnings jumped 80% to $0.09 per diluted share. Management also gave third-quarter guidance above what analysts anticipated.

"The persistent and unbridled demand for our software, for an effective enterprise platform that makes artificial intelligence capabilities useful to large institutions, shows no signs of relenting," CEO Alex Karp commented in his shareholder letter.

Palantir stock trades at a very expensive valuation

Going forward, Wall Street expects Palantir's adjusted earnings to increase at 22% annually through 2025. That consensus estimate makes the current valuation of 106 times adjusted earnings look expensive. Generally speaking, analysts agree with that assertion. Palantir has a median 12-month price target of $28 per share, which implies 18% downside from its current share price of $34. I would personally avoid this stock until it trades at a much more reasonable valuation.

Should you invest $1,000 in Palantir Technologies right now?

Before you buy stock in Palantir Technologies, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Palantir Technologies wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $716,375!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 9, 2024

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Etsy and Palantir Technologies. The Motley Fool has positions in and recommends Alphabet, Etsy, and Palantir Technologies. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.