Why Palantir Technologies stock rallied Monday morning

Actions of Palantir Technologies (PLTR 13.02%) charged from the gate on Monday, rising to 12.8%. As of 11:58 a.m. ET, the stock was still up 12.4%.

The catalyst that sent the artificial intelligence (AI) software and data mining specialist higher was an announcement that the company would join one of the major stock indexes.

Meet the newest member of the S&P 500

An announcement that dropped after the market closed on Friday revealed that Palantir would be joining S&P 500 at the start of trading on September 23. In a press release detailing the reshuffle, S&P Global noted: “The changes ensure that each index is more representative of its market capitalization range.”

To be eligible to join the S&P 500, a company must meet the following criteria:

• Must be based in the US
• It must have a market capitalization of at least $8.2 billion.
• At least 50% of its shares must be publicly traded.
• It must have been profitable in the most recent quarter.
• The sum of earnings for the last four quarters must be positive.

Stocks often rise when they initially join the benchmark, as institutional investors and funds that track major market indices buy stocks to replicate their holdings.

Should investors buy Palantir now?

To be clear, Palantir joining the S&P is not a reason to buy it, but there are plenty of other reasons to be optimistic.

The company’s decades of experience in artificial intelligence helped it pivot quickly when generative AI went viral early last year. The company’s artificial intelligence platform (AIP) has seen strong demand thanks to Palantir’s bootcamps, where engineers work hand-in-hand with companies to help them succeed.

As a result, while Q2 revenue was up 27% year-over-year, US commercial revenue — which includes AIP — was up 55% and customer count was up 83%. In addition, the remaining value of transactions (or backlog) increased by 103%.

Palantir’s valuation, at 96 times forward earnings and 23 times sales, means it’s not for everyone. However, its price-to-earnings-growth (PEG) ratio — which takes into account its extraordinary growth — sits at less than 1, the standard for an undervalued stock.

I think Palantir is a buy.