Palantir Technologies (PLTR -2.55%) is a data analytics company that has been one of the hottest investments to own on the market this year. Trading up nearly 130% so far in 2023, the tech stock has soundly beaten the S&P 500 this year, and its top and bottom lines have been showing improvement. And there could soon be a lot more bullishness surrounding the stock.
Palantir may soon be in the S&P 500
The top 500 companies traded on U.S. exchanges find their way onto the S&P 500 index (assuming they meet certain other criteria as well), and making it into the top index is a big milestone. Being in the index means more visibility for a stock, more investors adding it to their portfolios, more index funds that track the S&P 500 adding shares, and a potentially higher share price as a result of all this added interest.
Palantir has a market cap of over $30 billion, and it's already a fairly large business. It has been doing well this year due to the growing popularity of artificial intelligence (AI) and data analysis. The company's CEO, Alex Karp, believes that the company may soon become eligible for listing on the S&P 500.
Why isn't Palantir's stock already in the index?
A key criterion for a stock to be included in the S&P 500 is that it needs to be profitable over the past four quarters. That's what's currently holding Palantir's business back because, while it has been profitable for three straight quarters, over the trailing 12 months its bottom line remains in the red:
PLTR Net Income (TTM) data by YCharts.
Palantir's business is trending in the right direction, and Karp believes that after the company's next round of quarterly results, which will come out in November, and Palantir presumably posts another profit, it will be able to clear that hurdle.
That doesn't, however, mean that Palantir will automatically get added to the index. A committee still has to agree to add the stock to the S&P 500. So even though Palantir's stock may seem like a safe bet to make it in there, given its size, liquidity, and profitability, it could still take some time before it makes it into the index.
Palantir's results have been improving
Palantir has been an exciting growth stock to own in recent years, but the big knock on it has been that its operations weren't profitable. And that's likely a key reason that shares of the company fell by 65% last year. As investors grew concerned about stocks amid rising inflation, they dumped unprofitable and risky growth stocks in the process.
Now, with Palantir expecting positive net income for each quarter of 2023 and still expecting revenue growth, it has found its way back into the good graces of investors. Last quarter, for the period ending June 30, sales of $533.3 million grew at a rate of 13%. And net income of $28.1 million was a significant improvement from the $179.3 million loss Palantir recorded in the same period last year.
Is Palantir's stock a buy?
Palantir isn't a cheap stock to own as it trades at 63 times its estimated future profits and more than 10 times its book value. Even if the company continues to grow and the stock does rise in value once it gets added to the S&P 500, the risk is that investors are already pricing in a lot of its future growth. There could be significant downside risk to owning the stock at such an inflated price tag.
I would wait until at least another quarter or two to see how the company's growth rate is doing and to see if Palantir's AI offerings are starting to pay off. With a 13% growth rate last quarter, that doesn't exactly scream growth right now, which is why I would take a wait-and-see approach with the stock for the time being.
