Meet the newest stock in the S&P 500. It’s up 430% since the start of last year and is still a buy right now, according to a Wall Street analyst

The S&P 500 is the best global benchmark of the American stock market, made up of the 500 largest companies in the country. Given the scope of its member companies, it is considered by many to be the most reliable indicator of overall stock market performance. To be included in the S&P 500, companies must meet the following requirements:

• Be a US based company
• Have a market capitalization of at least $8.2 billion
• It should be very liquid
• At least 50% of its outstanding shares must be available for trading
• Must be profitable under GAAP in the most recent quarter
• It must be profitable in total for the last four quarters

Palantir Technologies (PLTR 0.17%) is poised to be one of the newest additions to the S&P 500, joining the ranks on Sept. 23 and one of 11 companies added so far this year. Since the start of 2023, Palantir shares are up 430% as accelerated adoption of generative AI boosted its revenue and boosted its profits.

However, despite its extraordinary run, some on Wall Street believe it still has a long way to go. Let’s look at what sets Palantir apart and whether the stock is still a buy.

Image source: Getty Images.

Pioneering AI before AI went viral

Palantir has been at the forefront of AI development for more than 20 years. First, it created sophisticated algorithms to help the US government and its allies identify and track potential terrorist threats by finding connections between seemingly unrelated data that would lead to potential attackers.

However, Palantir soon set its sights on enterprise businesses, where the same AI models could find patterns among reams of data, resulting in actionable intelligence. The company’s decades of experience helped Palantir pivot when generative AI went viral last year, creating next-generation AI tools that companies can actually use. The fruit of these efforts is its Artificial Intelligence Platform (AIP), designed to help companies make data-driven decisions.

In a demonstration video, Palantir demonstrates how AIP leverages company data to help minimize the impact of a production line shutdown due to an approaching hurricane. The system analyzes existing orders, making suggestions about which to cancel, postpone or expedite, which shipments can be handled by other fulfillment centers, and what impact those decisions will have on both sales and backlog. The system also evaluates other potential decisions, including the cost of hiring trucks to expedite deliveries ahead of the pending storm and how they will affect profits.

Despite the obvious benefits, the technology involved could be off-putting to all but the most tech-savvy. Palantir has overcome this hurdle by offering AIP bootcamps. These hands-on sessions feature executives and developers who work hand-in-hand with Palantir engineers to help solve real-world business problems.

This approach has been tremendously successful. Palantir grew its US commercial customers by 83% year-over-year and 13% sequentially in the second quarter. Palantir credits these AIP bootcamps with facilitating 27 new deals worth $10 million or more — most within weeks of clients attending one of these sessions.

Additionally, a deal that closed just last month will bring AIP, as well as Palantir’s Gotham, Foundry, and Apollo platforms, to Microsofthis (MSFT 0.94%) secure Azure Government Cloud, expanding Palantir’s existing government business.

It’s hard to overstate the impact this has had on the company’s bottom line. In the second quarter, revenue of $678 million rose 27% year-over-year and 7% quarter-over-quarter, marking Palantir’s seventh consecutive quarter of profitability — marking its entry into the S&P 500. U.S. commercial revenue , led by AIP, grew 55% year-on-year, while customer numbers grew 83%. The remaining transaction revenue (VDR) for the segment, which is the value of contracts not yet recorded in revenue, increased by 103%.

However, the opportunity presented by AI is just beginning. In Ark Invest’s Big ideas 2024Cathie Wood estimates that the software opportunity associated with generative AI could be worth $13 trillion by 2030. The bull case is even higher at $37 trillion.

Given the scale of this opportunity and its location at the intersection of artificial intelligence and business intelligence, Palantir is well positioned to take advantage of this secular tailwind.

The bulls run

Don’t take my word for it. Following Palantir’s admission to the S&P 500, Bank of America analyst Mariana Pérez Mora maintained a buy rating on Palantir shares while raising her price target to $50. This represents a potential upside of 45% from Monday’s closing price.

Mora notes a “fundamental misunderstanding” about Palantir’s opportunity and calls its addition to the S&P 500 a “watershed moment” as institutional investors will be forced to revise what they think they “know” about Palantir, especially given the outlook its rapid growth.

To be clear, Palantir won’t be right for every investor. The stock currently trades at 96 times forward earnings and 23 times forward sales. However, the price-to-earnings-growth (PEG) ratio — which takes into account explosive growth — is less than 1, the standard for an undervalued stock.

For investors with the stomach for increased volatility, Palantir is poised to lead the AI ​​revolution to new heights that could benefit shareholders along the way.