Is Palantir stock a buy before September 20?

Every quarter, S&P 500 rebalances the index. This means that new companies are added to the index, replacing existing members who are no longer eligible.

A company that has been eligible for inclusion in the S&P 500 for some time but has not yet been added to the index is Palantir Technologies (PLTR 1.55%). With the next rebalancing scheduled for September 20th, is now the time to load up on your Palantir shares?

How do companies become eligible for the S&P 500?

Eligibility criteria for inclusion in the S&P 500 vary based on factors such as market capitalization, profitability, share float and corporate structure. In this article, I will focus primarily on profitability criteria. To become eligible for the S&P 500, a company must be profitable for the past four quarters, while generating a profit in the most recent quarter.

To be clear, this means that your business could burn through cash for three consecutive quarters, but then generate a profit in the fourth quarter that is massive enough to make its trailing 12-month net amount positive . The chart below illustrates Palantir’s profitability over the past several quarters.

Image Source: Palantir Investor Relations. GAAP = generally accepted accounting principles. Y/Y = year over year.

Palantir has generated positive net income on a generally accepted accounting principles (GAAP) basis for seven consecutive quarters. The company has clearly demonstrated the ability to operate in a consistently profitable manner. However, there may be some big reasons why Palantir wasn’t picked for the S&P 500 despite its rising profit levels.

Why hasn’t Palantir been added to the S&P 500 yet?

To be blunt, I can’t definitively say why Palantir hasn’t yet been picked for the S&P 500. However, my fellow nerd Jake Lerch made a smart observation in March about what the management decision might be.

It’s no secret that artificial intelligence (AI) has served as a big catalyst for the tech sector over the past couple of years. Palantir’s enterprise software platforms specialize in big data analytics and have witnessed growing demand due to massive investments in AI.

As the charts below clearly illustrate, Palantir’s revenue has really taken off over the past couple of years. Moreover, this new AI-driven growth has contributed to increased sustained profitability.

PLTR Revenue Data (Quarterly) by YCharts.

Another concern could be that Palantir relies heavily on large government contracts. In general, government agreements can be nebulous and unpredictable. These dynamics make it difficult to assess what a company’s future growth may look like.

At the end of the day, there’s an argument to be made that Palantir’s current growth is fleeting and that the company is only benefiting from AI hype. While I understand that thesis, I think it’s short-sighted.

Image source: Getty Images.

Should You Buy Palantir Before September 20th?

Earlier this year, IT architecture specialist Super Micro Computer was added to the S&P 500. Like Palantir, Supermicro has entered a new phase of growth driven in large part by major investments in AI infrastructure such as data centers.

However, unlike Palantir, Supermicro’s gross margin and profit levels are very inconsistent — and yet the company still gained a spot in the S&P 500 ahead of Palantir. Additionally, capital expenditure (capex) investment should continue to rise, driven by mega-cap technology benchmarks such as Amazon, Alphabetand Microsoft.

To me, concerns about the long-term sustainability of Palantir’s growth are overblown and should be put to rest. Whether you should invest in Palantir before the next S&P 500 rebalance comes down to your risk appetite. Frankly, I wouldn’t be surprised to see Palantir stock see a bit of a boost as September 20 approaches.

However, investing in momentum stocks can be a real risk and leave you holding the bag if you’re not careful. It’s important to note that Palantir is a growth stock and faces huge volatility compared to blue chip opportunities. Additionally, Palantir stock is far from a bargain given its forward price-to-earnings (P/E) ratio of 89.5.

If Palantir finally earns its spot in the S&P 500, you may see some gains in your portfolio. However, I think a more prudent strategy is to invest in Palantir using dollar cost averaging over a long time horizon duration — allowing you to buy at different price points over time and mitigate timing risks. Investors should not weigh too much in specific dates when buying a stock, but rather consider the long-term outlook.

And to me, Palantir’s future looks bright as the AI ​​revolution continues to take shape. I believe the company’s growth is just beginning and I see more significant gains to come.