Palantir Technologies (PLTR), a leading enterprise AI company that serves both government and private sector clients, will join the S&P 500 index (SPY) later this month, while American Airlines (AAL) gets removed. Palantir’s stock surged more than 14% on news of the index inclusion, boosting investor sentiment. I am bullish on the prospects for Palantir as I believe the company will be a big winner in AI adoption. But going by empirical evidence, investors should curb their enthusiasm about Palantir’s S&P 500 inclusion.
Palantir Shareholders Need to be Cautious
Before we get to the bullish points, it is important to address some concerns. Although investors cheered Palantir’s S&P 500 inclusion, historical data suggests the market may have overreacted. According to a study conducted by the Federal Reserve Bank of New York using data spanning more than two decades, the average return from the announcement of inclusion in the S&P 500 index to the effective date is 4.34%. The total return from index inclusion has historically been around 6%. Palantir’s stock has already gained 14% since the index inclusion announcement, more than double the typical return.
Another study, conducted by consulting firm McKinsey & Company, found that the initial positive returns resulting from S&P 500 inclusion are temporary. After analyzing the index inclusion effect of hundreds of companies added to the S&P 500 since its inception in 1957, McKinsey found that the initial positive returns often disappear after 35 trading days on the index.
Going by the historical data, Palantir shareholders need to be cautious about the overwhelmingly positive reaction to the company’s inclusion in the S&P 500 index, as a potential reversal of the recent gains could be in the cards. That said, the company will benefit from the prestige associated with the S&P 500, a benchmark index that is comprised of the 500 largest U.S. publicly traded companies based on market capitalization.
Analysts Are Positive About S&P 500 Inclusion
My bullish stance has nothing to do with whether Palantir is part of a prestigious stock index or not. Wall Street analysts, however, appear to be positive about this new development despite empirical evidence suggesting that the long-term fundamentals of a company are unlikely to change materially due to index inclusion.
Wedbush Securities analyst Dan Ives, who has been bullish on Palantir for years, wrote that Palantir’s S&P 500 inclusion is a validation moment as it emphasizes the improving profitability of the company. Palantir’s recent performance backs this claim, as its net profits surged to $134.1 million in Q2 2024 compared to $28.1 million a year ago. Ives also claimed that Palantir is well-positioned to enjoy a healthy deal flow. He is not alone in his bullish outlook. TheStreet Pro’s Stephen Guilfoyle wrote in a note that the S&P 500 inclusion is positive for Palantir.
Palantir Is Expanding into New Business Segments
My bullish stance on Palantir is not based on the company’s S&P 500 inclusion. I believe Palantir will be one of the biggest winners of global AI adoption. There are two main reasons behind my investment thesis, with the first being the company’s expansion into unconventional business sectors, which positions it to emerge as the leading enterprise AI solutions provider in several high-growth, niche markets.
The unique end markets that Palantir is expanding into include agriculture, climate change, public health, and renewable energy. The company’s move into the precision agriculture market, which is expected to be valued at $34 billion by 2032, and collaboration with leading public health agencies, such as the Centers for Disease Control (CDC) and National Health Service in the United Kingdom, are recent examples of Palantir’s expansion into fast-growing, unconventional sectors.
International Expansion Will Reward Investors
The second reason I’m bullish on Palantir’s stock is the untapped global growth opportunity ahead of the company. As of the second quarter, the domestic market accounted for 64% of total company revenue, and the UK accounted for 11% of revenue. All other international markets comprised just a fourth of Palantir’s sales, suggesting the company has a long runway for international growth.
Palantir, which has a presence in approximately 150 countries, is shifting its focus to fast-growing markets such as Asia and Latin America. This strategy is likely to boost revenue growth. As part of its Asian expansion, Palantir recently entered into a strategic partnership with South Korean automaker Hyundai. Palantir has also been actively targeting major Latin American economies such as Brazil. During the company’s Q2 earnings call, Palantir’s management team confirmed that they will continue to invest in global business to drive future growth.
These expansion efforts come at a time when corporate AI spending is projected to grow exponentially in foreign markets. According to IDC, Asia-Pacific spending on AI will grow at a compound annual growth rate (CAGR) of 26% through 2027, boosting total annual spending to $78 billion. Palantir’s position as a reliable enterprise AI solutions provider is likely to help the company win new customers.
High-Profile Partnerships Fuel Palantir’s Growth
In addition to the two main bullish reasons discussed above, the company’s success in securing high-profile partnerships has also boosted my sentiment towards the company. Last month, Palantir signed a deal with Microsoft (MSFT) to expand their collaboration focused on offering cloud computing and AI services to defense and intelligence agencies in the U.S. The two companies will create an integrated solution combining Microsoft’s Azure Cloud and OpenAI solutions with Palantir’s Gotham, Foundry, Apollo, and AIP.
Palantir also secured a $33 million contract with the Pentagon in June, strengthening the company’s relationship with the U.S. government. Securing government contracts improves Palantir’s finances and reputation as an enterprise AI solutions provider, paving the way for strong commercial customer growth. In the second quarter, Palantir added 126 new commercial customers, marking year-over-year growth of more than 40%.
Is Palantir a Buy According to Wall Street Analysts?
My bullish view on Palantir is not shared by Wall Street analysts. Based on the ratings of 14 analysts, the average Palantir price target is $25.42, which implies downside risk of 27% from the current market price.
Still, Palantir’s stock market performance this year has been exceptional, with the share price more than doubling amid rising profitability, new contract wins, and, now, the S&P 500 inclusion. In the long run, I believe Palantir’s strong earnings profile will support an even higher stock price.
Conclusion – Palantir Seems Well-Positioned to Grow in the Next Decade
Palantir has grown leaps and bounds in the last few years, helping the company to secure a spot in the S&P 500 index. However, the market reaction to this positive development has been overdone based on the historical data. Nonetheless, Palantir seems well-positioned to grow in the next decade, aided by its expansion into unconventional business sectors and strong international sales. The company’s healthy relationship with government agencies will also help its brand and reputation, potentially paving the way to acquire new commercial customers.
