The subsequent rebalancing for the S&P 500 is scheduled for Sept. 20.
Every quarter, the S&P 500 index rebalances. This implies new firms are added to the index, changing present members which are not eligible.
One firm that has been eligible for S&P 500 inclusion for fairly a while however is but to be added to the index is Palantir Applied sciences (PLTR 1.55%). With the subsequent rebalance scheduled for Sept. 20, is now the time to load up on Palantir inventory?
How do firms turn into eligible for the S&P 500?
Eligibility standards for S&P 500 inclusion varies amongst components equivalent to market cap, profitability, inventory float, and company construction. On this article, I will primarily give attention to the profitability standards. To turn into eligible for the S&P 500, an organization should be worthwhile over the earlier 4 quarters whereas particularly producing a revenue in the newest quarter.
To be clear, this implies your enterprise may burn money for 3 straight quarters however then generate a revenue within the fourth quarter that is huge sufficient to make the web sum during the last 12 months a optimistic determine. The chart under illustrates Palantir’s profitability during the last a number of quarters.
Picture supply: Palantir Investor Relations. GAAP = usually accepted accounting rules. Y/Y = yr over yr.
Palantir has generated optimistic web earnings on a usually accepted accounting rules (GAAP) foundation for seven consecutive quarters. The corporate has clearly demonstrated a capability to function in a constantly worthwhile manner. Nevertheless, there could also be a few large explanation why Palantir hasn’t been chosen for the S&P 500 regardless of its rising revenue ranges.
Why hasn’t Palantir been added to the S&P 500 but?
Simply to be upfront, I can’t definitively say why Palantir hasn’t been chosen for the S&P 500 but. Nevertheless, my fellow Idiot Jake Lerch made an astute commentary again in March as to what would be the driving determination.
It is no secret that synthetic intelligence (AI) has served as a giant catalyst for the expertise sector during the last two years. Palantir’s enterprise software program platforms concentrate on large information analytics and have witnessed hovering demand due to hefty investments in AI.
Because the charts under clearly illustrate, Palantir’s income actually began to kick into gear during the last two years. Furthermore, this newfound AI-driven development helped gasoline sustained profitability.
PLTR Income (Quarterly) information by YCharts.
One other concern could possibly be that Palantir depends closely on massive authorities contracts. Usually talking, authorities offers could be lumpy and unpredictable. These dynamics make it difficult to evaluate what an organization’s future development could appear to be.
On the finish of the day, there’s an argument to be made that Palantir’s present development is fleeting and that the corporate is barely benefiting from the AI hype. Whereas I perceive that thesis, I feel it is shortsighted.
Picture supply: Getty Photographs.
Do you have to purchase Palantir earlier than Sept. 20?
Earlier this yr, IT structure specialist Tremendous Micro Pc was added to the S&P 500. Similar to Palantir, Supermicro has entered a brand new part of development largely pushed by hefty investments in AI infrastructure, equivalent to information facilities.
But, in contrast to Palantir, Supermicro’s gross margin and revenue ranges are very a lot inconsistent — and but, the corporate nonetheless earned a spot within the S&P 500 earlier than Palantir. Moreover, investments in capital expenditures (capex) ought to proceed to rise, based on administration at mega-cap tech stalwarts equivalent to Amazon, Alphabet, and Microsoft.
To me, considerations over the long-run sustainability of Palantir’s development are overblown and ought to be put to relaxation. Whether or not you need to spend money on Palantir earlier than the subsequent S&P 500 rebalancing boils all the way down to your danger urge for food. Candidly, I might not be shocked to see shares of Palantir witness a little bit of momentum as Sept. 20 attracts nearer.
Nevertheless, investing in momentum shares could be a actual danger and go away you as a bag holder in case you’re not cautious. It is essential to understand that Palantir is a development inventory and experiences outsize volatility in comparison with blue chip alternatives. Moreover, Palantir inventory is much from a cut price, contemplating its ahead price-to-earnings (P/E) ratio of 89.5.
Ought to Palantir lastly earn its spot within the S&P 500, you very properly may even see some features in your portfolio. Nevertheless, I feel a extra prudent technique is to spend money on Palantir utilizing dollar-cost averaging over a long-term horizon — permitting you to purchase in at totally different worth factors over time and mitigate timing dangers. Traders should not weigh an excessive amount of on particular dates when shopping for a inventory however reasonably contemplate the long-term outlook.
And to me, Palantir’s future seems brilliant because the AI revolution continues to take form. I feel the corporate’s development is barely simply starting, and I see extra important features to return.
John Mackey, former CEO of Entire Meals Market, an Amazon subsidiary, is a member of The Motley Idiot’s board of administrators. Suzanne Frey, an government at Alphabet, is a member of The Motley Idiot’s board of administrators. Adam Spatacco has positions in Alphabet, Amazon, Microsoft, and Palantir Applied sciences. The Motley Idiot has positions in and recommends Alphabet, Amazon, Microsoft, and Palantir Applied sciences. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
