Palantir stock will join the S&P 500 in September. History says it could grow after that.

The S&P 500 (^GSPC 0.75%) the index measures the performance of 500 US companies covering about 80% of domestic stocks by market value. The index is generally considered the best barometer for the entire US stock market.

Palantir Technologies (PLTR 0.17%) will join the S&P 500 on Monday, September 23 as part of the index’s quarterly rebalancing. It also joins the index Dell Technologies and Erie allowance. The three companies will replace Etsy, American Airlinesand Bio-Rad Laboratories.

Shares of Palantir have surged 124% in 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 that Palantir stock could rise after its inclusion in the S&P 500

As of 2019, a total of 93 companies have been added to the S&P 500. Of these companies, 76 have been members of the index for at least one year. Here’s how these stocks performed in the first 12 months after inclusion:

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

The numbers change slightly if we go back further. Since 2014, a total of 178 companies have been added to the S&P 500. Of these companies, 161 have been members of the index for at least one year. Here’s how these stocks performed in the first 12 months after inclusion:

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

In short, history says Palantir will achieve double-digit returns of 10% to 13% in the 12 months since its inclusion in the S&P 500.

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

To that end, whether Palantir shares rise or fall 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 enable companies to collect data, develop machine learning models and integrate those digital assets into an ontology. Ontology connects data and models to real-world decisions so users can highlight insights through analytics applications to improve business outcomes. The company says its “key differentiator is a software architecture that revolves around the Palantir ontology.”

Last year, Palantir released a new product called the 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 Alphabetof Google and C3. have scored higher on product development strategy.

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

“The persistent and unbridled demand for our software, for an efficient enterprise platform that makes AI capabilities useful to large institutions, shows no signs of letting up,” CEO Alex Karp commented in his letter to shareholders.

Palantir stock is trading at a very expensive valuation

Going forward, Wall Street expects Palantir’s adjusted earnings to grow 22% annually through 2025. That consensus estimate makes the current valuation of 106 times adjusted earnings look expensive. Analysts generally agree with this statement. Palantir has a 12-month median price target of $28 per share, implying an 18% downside to the current share price of $34. I would personally avoid this stock until it trades at a much more reasonable valuation.