Shares of Palantir Technologies(NYSE: PLTR) have advanced more than 250% year to date due to strong financial results. This was driven by strong demand for its artificial intelligence (AI) platform and excitement surrounding the company's addition to the S&P 500.
Last week, Palantir announced plans to remove itself from the New York Stock Exchange and relist on the Nasdaq exchange, effective Nov. 26. The company said in a press release that it "anticipates meeting the eligibility requirements of the Nasdaq-100 index" once the move is complete.
Ultimately, transitioning to a different index won't have a major impact on the business, though it can improve the liquidity and visibility of the stock. Consequently, Palantir shares jumped more than 11% on the news, and history says there may be more gains in store for shareholders if the company is added to the Nasdaq-100.
Here's what investors should know.
Historically, stocks have moved higher after being added to the Nasdaq-100
The Nasdaq-100 tracks the 100 largest non-financial companies that trade on the Nasdaq Stock Market. The index is rebalanced quarterly in March, June, and September and reconstituted annually in December. That means Palantir could be added to the Nasdaq-100 within weeks of relisting on the Nasdaq exchange.
Past performance is never a guarantee of future results, but I reviewed historical data to see what typically happened to a company's stock price after it was added to the Nasdaq-100. Here's what I found:
- The last five years: About 40 companies have been added to the Nasdaq-100 since 2019. Collectively, their stocks returned an average of 11% during the 12-month period following their inclusion in the index.
- The last decade: About 85 companies have been added to the Nasdaq-100 since 2014. Collectively, their stocks returned an average of 17% during the 12-month period following their inclusion in the index.
In short, history says Palantir shareholders could see upside between 11% and 17% during the year after the company is added to the Nasdaq-100. Of course, that's hypothetical at this point because Palantir hasn' yet been selected to join the index.
More importantly, whether or not Palantir is included in the Nasdaq-100 index has nothing to do with its business, which means any impact on its stock price will likely be transitory. To that end, investors shouldn't buy Palantir stock simply because it may be added to the Nasdaq-100 in the near future. Instead, the decision to buy or avoid the stock should be based on its financial profile, growth prospects, and valuation.
Is Palantir Technologies a smart investment right now?
Palantir specializes in data analytics and artificial intelligence. Its core platforms, Foundry and Gotham, help commercial organizations and government agencies integrate complex data, develop machine learning (ML) models, and query data to surface insights that improve decision-making. And its artificial intelligence platform (AIP) adds support for large language models.
In the commercial sector, manufacturers lean on Palantir's Foundry platform to optimize production and avoid supply chain disruptions, while retailers use the product to manage inventory and improve marketing. In the government sector, various agencies involved in defense and intelligence rely on the Gotham platform to identify potential threats and prevent criminal activity.
Forrester Research recently recognized Palantir as a leader in AI/ML platforms, a market forecast to grow at 41% annually through 2028, according to the International Data Corp. (IDC). Principle analyst Mike Gualtieri wrote, "Palantir is quietly becoming one of the largest players in this market."
Palantir reported impressive financial results in the third quarter, beating forecasts on the top and bottom lines. Revenue increased 30% to $726 million, accelerating for the fifth consecutive quarter, and non-GAAP earnings soared 43% to $0.10 per diluted share. CEO Alex Karp told shareholders, "The release of our newest platform, AIP, has transformed our business."
Unfortunately, Palantir presents investors with a tricky choice. Demand for AI/ML software is expected to rise markedly in the coming years, and Palantir is clearly executing on that opportunity. But the stock trades at an outrageous 175 times adjusted earnings. That multiple looks expensive even if we assume earnings increase at 40% annually through 2028 (i.e., in line with the forecasted growth of the AI/ML platforms market).
I think investors should avoid this stock at the present time. That doesn't mean Palantir shares will crash in the near future, but rather that other AI stocks trade at more reasonable valuations, which makes them less risky.
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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
