Meet the Newest Addition to the S&P 500. The Stock Has Soared 575% Since Early Last Year, and It’s Still a Buy Right Now, According to 1 Wall Street Analyst

The S&P 500 is regarded as the best overall benchmark of the U.S. stock market and consists of the 500 largest publicly traded companies in the country. Given the range of its member companies, it is considered to be the most dependable gauge of overall stock market performance. To become part of the S&P 500, a company must meet the following prerequisites:

• Be a U.S.-based company.
• Have a market cap of at least $8.2 billion.
• Be highly liquid.
• Have a minimum of 50% of its outstanding shares available for trading.
• Be profitable according to GAAP in the most recent quarter.
• Be profitable over the preceding four quarters in aggregate.

Palantir Technologies (PLTR 0.17%) is one of the most recent additions to the S&P 500, being added to the fold on Sept. 23. It’s also one of only 11 companies to make the grade so far this year. Since the advent of generative AI in early 2023, Palantir stock has surged 575%, its gains fueled by robust sales and profit growth.

Even after gains of that magnitude, some on Wall Street believe there’s more to come. Let’s review what has driven the stock higher and whether its lofty price has simply made it too risky.

AI solutions for the masses

Palantir made a name for itself serving the U.S. intelligence and law enforcement communities. The company’s first-of-their-kind algorithms could sift through mounds of data and connect seemingly disparate bits of information to track down would-be terrorists.

In more recent years, Palantir has applied its sophisticated algorithms to give enterprises a competitive edge by providing actionable business intelligence. Thanks in part to its decades of experience, the company quickly recognized the opportunity represented by generative AI and developed timely solutions to meet the need. Palantir’s Artificial Intelligence Platform (AIP) was born of those efforts. By leveraging existing company data, AIP can provide businesses with solutions tailored to specific needs.

The proof is in the pudding

Palantir’s go-to-market strategy for AIP is what helped set the company apart. The company offers boot camps that pair customers with Palantir engineers to help them fashion solutions to their unique challenges. This strategy has proven to be wildly successful.

Just last month, Palantir announced a new multi-year, multi-million-dollar contract with Nebraska Medicine, which used AIP to improve healthcare by harnessing technology. After what it describes as “a series of targeted bootcamps,” the health system was able to implement a new workflow that resulted in a more than 2,000% increase in its Discharge Lounge utilization, which freed up beds earlier and decreased the time needed to discharge a patient by one hour (on average).

This is just one example of dozens of customer testimonials that show that AIP is saving customers time and money — which in turn boosts Palantir financial results. In the second quarter, it closed 96 deals worth at least $1 million. Of those, 33 were worth $5 million or more, while 27 were worth at least $10 million. Furthermore, many of these deals were inked within just weeks of a successful boot camp session.

Taking a step back helps illustrate the impact on the company’s overall results. In the second quarter, Palantir’s revenue grew 27% year over year to $678 million while also climbing 7% quarter over quarter. This also marked the company’s seventh successive quarter of profit generation. Consistent profitability was the final hurdle needed to secure its admission to the S&P 500. Furthermore, Palantir’s U.S. commercial revenue, fueled by the success of AIP, grew 55% year over year, while the segments customer count grew by 83%. Even more impressive was the segment’s remaining deal revenue (RDV) which soared 103%. When RDV is growing faster than revenue, it shows that future revenue growth is accelerating.

Most experts suggest this is still the early innings for the adoption of AI software. In Ark Invest’s Big Ideas 2024, Cathie Wood calculates the opportunity for generative AI software could balloon to $13 trillion by 2030. The bull case is even more eye-catching, at $37 trillion.

Given Palantir’s unique take on AI implementation and the magnitude of the opportunity, it’s clear the company can continue to prosper in an increasingly AI-centric world.

Wall Street’s biggest Palantir bull

I’m not the only one who thinks so. On the heels of its admittance into the S&P 500, Greentech Research analyst Hilary Kramer posited that Palantir “easily can be” a $100 stock. That represents potential upside of 130% compared to Monday’s closing price.

Kramer believes that given the company’s strong revenue and profit growth and increasing backlog, investment banks will eventually have to get on board and increase their estimates, which will cause others to look at the stock, fueling a virtuous cycle.

Despite the massive opportunity and stellar execution, some investors will be put off by Palantir’s frothy valuation. The stock is currently selling for 122 times forward earnings and 29 times forward sales. However, using the forward price/earnings-to-growth (PEG) ratio — which considers the company’s impressive growth rate — clocks in at 0.4, when any number less than 1 signals an undervalued stock.

In a case like this, when valuation is a stumbling block, dollar-cost averaging allows investors to ease into the stock over time, picking up more shares when the price is more reasonable.

Make no mistake: Palantir is positioned to profit from the AI revolution. Investors with a stomach for some volatility and a bit more risk should consider a position is this cutting-edge AI stock.