Palantir Technologies (NYSE: PLTR) investors recently got great news: The artificial intelligence (AI) and data analytics company is joining the S&P 500 . The stock has been quite volatile since the company went public in 2020. Making the S&P 500 validates what many investors have long been saying: Palantir is a quality business deserving recognition among America's most prominent companies.
Now that Palantir is bound for the S&P 500, what does that mean for investors today? The stock price has already risen more than 127% over the past year.
Should you buy Palantir stock now? Here is what you need to know.
Palantir could get an S&P 500 boost
Palantir making the S&P 500 is a big deal for several reasons.
First, it provides some validation that Palantir is a quality business. Companies must meet specific requirements to join the S&P 500 index, including consistent profitability under generally accepted accounting principles ( GAAP ) and certain market cap thresholds. These requirements help keep speculative stocks out of the index and ensure the S&P 500 represents the best American companies. Palantir passing those rules is noteworthy, but the simple inclusion into the S&P 500 is a badge of honor that could make investors see the stock in a new light.
Additionally, it should create investor demand for the stock. Many people invest in exchange-traded funds that track the S&P 500 index. Once Palantir formally joins the index, these funds must buy Palantir accordingly.
The stock stands on its own
It is exciting that Palantir has joined the S&P 500, but its strong fundamentals ultimately got it into the index, and they should form the basis of any investor's thesis .
Palantir is profitably growing because of the custom software it sells to the United States government, its allies, and to private U.S. companies. This technology combines artificial intelligence and data analytics to provide insights and analysis that help users make more intelligent, real-time decisions. That is a vague description, but only because Palantir's technology is versatile. Palantir helps the government perform military operations. It helps hospitals run more efficiently. Palantir has helped detect financial fraud and uncover human trafficking. The use cases are seemingly endless.
The company launched its AIP platform last year for AI applications, and it has proven to be a significant growth catalyst . You can see that Palantir's revenue growth has accelerated since AIP launched:
PLTR Revenue (TTM) data by YCharts
Additionally, Palantir is a financially healthy company. Yes, it's comfortably GAAP profitable. It also has a strong balance sheet with $4 billion in cash and zero debt. The business should also hold up relatively well in a recession; it gets over half its revenue from the U.S. government, which is unlikely to rip out mission-critical software like Palantir's at a time when geopolitical tensions are prevalent worldwide.
Is the stock a buy now?
It's a great story, but buying the stock depends on how Palantir's valuation lines up against its growth prospects. Continually accelerating revenue growth points to a healthy growth outlook. Analysts expect the company to grow earnings by an average of 30% annually for the next three to five years. Meanwhile, the stock trades at a forward P/E of 85. That's pretty steep, even for a business compounding earnings at 30%.
Investors can look at the PEG ratio to understand just how expensive the stock is (the lower the PEG, the better). I generally look for PEG ratios between 1.5 and 2. Palantir's PEG ratio is 2.8 today. That's a notable gap that would probably require a sizable drop in the share price to make Palantir attractive again. Is that likely? Nobody can say for sure. Joining the S&P 500 could create more appetite for the stock, but the market has also become more volatile in recent weeks as economic data weakens and interest rate cuts appear imminent.
If the market continues to tremble, patience could present better buying opportunities over the coming months. For now, Palantir is an easy hold, but it is probably not a stock worth buying now.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy .
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