Shares of Palantir Technologies (NYSE:PLTR) have advanced more than 250% year to date thanks to strong financial results. This was driven by strong demand for its artificial intelligence (AI) platform and the excitement surrounding the company’s addition to the business S&P500.
Last week, Palantir announced plans to remove itself from the US New York Stock Exchange and relist on the Nasdaq exchange, effective November 26. The company said in a news release that it “expects to comply with the eligibility requirements of the Nasdaq-100 index” once the move is complete.
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Ultimately, switching indexes won’t have a major impact on the company, although it could improve the stock’s liquidity and visibility. As a result, Palantir’s shares rose 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 need to know.
The Nasdaq-100 tracks the 100 largest non-financial companies trading on the Nasdaq stock market. The index is rebalanced quarterly in March, June and September and reconstituted annually in December. This means that Palantir could be added to the Nasdaq-100 within weeks of its relisting on the Nasdaq.
Past performance is never a guarantee of future results, but I looked at historical data to see what typically happened to a company’s stock price after it was added to the Nasdaq-100. This is what I found:
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The past five years: Since 2019, approximately 40 companies have been added to the Nasdaq-100. Collectively, their shares have returned an average of 11% over the twelve month period following inclusion in the index.
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The past decade: Since 2014, approximately 85 companies have been added to the Nasdaq-100. Collectively, their shares have returned an average of 17% over the twelve month period following inclusion in the index.
In short, history says that Palantir shareholders could see an increase of between 11% and 17% during the year after the company is added to the Nasdaq-100. Of course, that’s hypothetical at this point, as Palantir has not yet been selected to be part of the index.
More importantly, whether or not Palantir is included in the Nasdaq-100 index has nothing to do with its business, meaning any impact on its stock price will likely be transitory. Therefore, investors should not buy Palantir stock simply because it could 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.
Palantir specializes in data analysis and artificial intelligence. The 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 the artificial intelligence platform (AIP) adds support for large language models.
In the commercial sector, manufacturers rely on Palantir’s Foundry platform to optimize production and prevent supply chain disruptions, while retailers use the product to manage inventory and improve marketing. In the government sector, several 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 that the International Data Corp. (IDC) is expected to grow 41% per year until 2028. Chief analyst Mike Gualtieri wrote: “Palantir is quietly becoming one of the biggest players in this market.”
Palantir reported impressive financial results in the third quarter, exceeding expectations on the top and bottom lines. Revenue rose 30% to $726 million, accelerating for the fifth consecutive quarter, and non-GAAP earnings rose 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 difficult choice. Demand for AI/ML software is expected to rise significantly in the coming years, and Palantir is clearly capitalizing on this opportunity. But the stock trades at an outrageous 175 times adjusted earnings. That multiple looks expensive, even though we assume profits will grow 40% annually through 2028 (that is, in line with the forecast growth of the AI/ML platform market).
I think investors should avoid this stock at this time. That doesn’t mean Palantir stock will crash in the near future, but rather that other AI stocks are trading at more reasonable valuations, making them less risky.
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Trevor Jennewine holds positions at Palantir Technologies. The Motley Fool holds positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
Palantir’s shares are up 250% in 2024 and may head for the Nasdaq-100. History says this could happen next. was originally published by The Motley Fool
