One of the most respected milestones a public company can reach is being added to the S&P 500. This stock index acts as an important barometer of the overall market -- and being included in this exclusive club implies that a company is among the best in its industry.
Of course, there's no guarantee a company will stay in the index as businesses can experience dramatic ebbs and flows in their results -- thereby impacting trading activity and valuations. Thankfully, the S&P 500 index is rebalanced once per quarter, and the next rebalancing is set to occur on June 21.
Among a sea of eligible candidates is artificial intelligence (AI) company, Palantir Technologies (PLTR 8.31%). Let's dig into what makes Palantir eligible, and assess if scooping up shares before the next rebalancing is a good idea.
This isn't Palantir's first rodeo
There are a number of criteria a company must meet in order to be eligible for the S&P 500. Some important parameters include the company's market cap, timing of its IPO, trading volume, and more.
I would argue that the most difficult criterion for S&P inclusion relates to profitability. To be chosen for the index, a company must generate positive earnings for the last four quarters. The caveat here is that only the most recent quarter has to include positive net income.
Palantir officially became eligible for the S&P 500 following its earnings report for the third quarter of 2023. Since then, the company has continued generating positive earnings. As of March 31, Palantir has now posted six consecutive quarters of profitability on a generally accepted accounting principles (GAAP) basis.
Since Palantir became eligible for the S&P 500 two quarters ago, companies including Super Micro Computer, Uber Technologies, Deckers Outdoor, and Jabil were added to the index.
Data source: Investor relations.
Will Palantir be chosen for the S&P?
Will Palantir be chosen for the S&P 500 on June 21? Maybe, but I wouldn't obsess too much over it. While there isn't any specified reason as to why Palantir hasn't been chosen yet, one idea could revolve around the current themes fueling Palantir's business.
For almost two decades, Palantir consistently posted hefty operating losses. While the company demonstrated it can sell its software to large enterprises, questions lingered around whether Palantir would ever reach sustained profits or just continue investing in growth a burn money.
But over the last year or more, applications in generative AI have emerged as a major growth catalysts for tech businesses. Palantir has been a beneficiary of AI demand, as the company's revenue, operating margins, and free cash flow are all soaring.
Image source: Getty Images.
Is now a good time to invest in Palantir stock?
With a price-to-sales (P/S) ratio of 20.9, Palantir trades at a premium to many of its software-as-a-service (SaaS) peers.
PLTR PS Ratio data by YCharts
I wouldn't balk at Palantir's premium valuation, though. Unlike many of these companies, Palantir is consistently profitable. This provides Palantir with financial flexibility, which it can use to further innovate and differentiate from its peers.
Moreover, the chart also indicates that Palantir might be a buy right now. While its P/S multiple remains high for a growth stock, it has noticeably declined from levels seen earlier this year. This dynamic is particularly notable, considering that Palantir demonstrated another strong performance in its first-quarter earnings report -- highlighted with further revenue and profit growth.
Overall, the big idea here is that while S&P 500 inclusion is nice, I wouldn't buy a stock based on that milestone alone. Investing in Palantir should be rooted in strong convictions about AI, big data analytics, and the company's ability to perform at a high level.
I see now as an opportunity to buy the dip in Palantir stock. Given the secular tailwinds fueling AI, Palantir looks well-positioned for robust, sustained growth. For these reasons, I think the company's ability to maintain its profit generation in the long run remains high.
