The S&P 500 is the best overall benchmark of the U.S. stock market, made up of the 500 largest companies in the country. Given the scope of its member companies, it is considered by many as the most dependable gauge of overall stock market performance. To be included in the S&P 500, companies must meet the following requirements:
Be a U.S.-based company
Have a market cap of at least $8.2 billion
Must be highly liquid
A minimum of 50% of its outstanding shares must be available for trading
Must be profitable according to GAAP in the most recent quarter
Must be profitable over the preceding four quarters in aggregate
Palantir Technologies (NYSE: PLTR) is poised be one of the newest additions to the S&P 500, joining the ranks on Sept. 23 and one of just 11 companies added so far this year. Since the beginning of 2023, Palantir stock has surged 430% as the accelerating adoption of generative AI has boosted its revenue and bolstered its profits.
Yet, despite its tremendous run, some on Wall Street believe there's a long runway ahead. Let's look at what distinguishes Palantir and whether the stock is still a buy.
AI pioneer before AI went viral
Palantir has been at the forefront of AI development for more than 20 years. It first created sophisticated algorithms to help the U.S. government and its allies identify and track potential terrorist threats by finding connections between seemingly unrelated data that would lead to would-be attackers.
However, Palantir soon set its sights on enterprise businesses, where those 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 businesses can actually use. The fruit of those labors is its Artificial Intelligence Platform (AIP), designed to help companies make data-driven decisions.
In one demo video, Palantir demonstrates how AIP harnesses company data to help minimize the impact of shutting down a production line due to an approaching hurricane. The system analyzes existing orders, making suggestions as to which ones to cancel, delay, or accelerate, which shipments can be handled by other fulfillment centers, and what impact those decisions will have on both sales and order backlogs. The system also assesses other potential decisions, including the cost of hiring trucks to accelerate deliveries ahead of the pending storm and how that will affect profits.
Despite the obvious benefits, the technology involved might be off-putting to all but the most tech-savvy. Palantir overcame this obstacle by offering AIP bootcamps. These hands-on sessions are attended by executives and developers, who work hand-in-hand with Palantir engineers to help solve real-world business problems.
This approach has been wildly successful. Palantir increased its U.S. commercial customer count 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 after customers attended one of these sessions.
Furthermore, a deal that was consummated just last month will bring AIP, as well as Palantir's Gotham, Foundry, and Apollo platforms, to Microsoft's (NASDAQ: MSFT) secure Azure Government Cloud, expanding Palantir's existing government business.
It's hard to overstate the impact this has had on the company's results. In the second quarter, revenue of $678 million grew 27% year over year and 7% quarter over quarter, resulting in Palantir's seventh consecutive quarter of profitability -- ushering in its admission to the S&P 500. U.S. commercial revenue, led by AIP, grew 55% year over year while its customer count grew 83%. The remaining deal revenue (RDV) for the segment, which is the value of contracts not yet booked into revenue, grew 103%.
Yet the opportunity represented by AI is only just beginning. In Ark Invest's Big Ideas 2024, Cathie 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 magnitude of that opportunity and its location at the crossroads of AI and business intelligence, Palantir is well positioned to profit from this secular tailwind.
The bulls are running
Don't take my word for it. In the wake of Palantir's admission into the S&P 500, Bank of America analyst Mariana Pérez Mora maintained a buy rating on Palantir stock while boosting her price target to a Street-high $50. That represents potential upside of 45% compared to Monday's closing price.
Mora cites a "fundamental misunderstanding" regarding Palantir's opportunity and calls its addition to the S&P 500 a "watershed moment," as institutional investors will be forced to revisit what they believe they "know" about Palantir, particularly given its rapidly improving growth prospects.
To be clear, Palantir won't be a good fit for every investor. The stock is currently selling for 96 times forward earnings and 23 times forward sales. However, its price/earnings-to-growth (PEG) ratio -- which factors in its meteoric growth -- clocks in at less than 1, the standard for an undervalued stock.
For investors with the stomach for some increased volatility, Palantir is poised to ride the AI revolution to new heights, which could profit shareholders along the way.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has positions in Microsoft and Palantir Technologies. The Motley Fool has positions in and recommends Bank of America, Microsoft, and Palantir Technologies. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Meet the Newest Stock in the S&P 500. It Soared 430% Since Early Last Year, and It's Still a Buy Right Now, According to 1 Wall Street Analyst was originally published by The Motley Fool