Palantir Technologies (NASDAQ: PLTR) is one of the most popular artificial intelligence (AI) stocks on the market. Shares have soared 345% year to date because of encouraging financial results and enthusiasm about its position in the burgeoning AI economy. That makes it the best-performing member of the S&P 500 (SNPINDEX: ^GSPC) in 2024.
Last month, Palantir transferred its stock from the New York Stock Exchange to the Nasdaq Exchange. The company said it anticipated meeting the eligibility criteria for the Nasdaq-100, a growth-focused index that tracks the 100 largest non-financial companies listed on the exchange.
The Nasdaq-100 is reconstituted annually in December. The additions and deletions are announced after the market closes on the second Friday of the month, and the changes take effect on the first trading day following the third Friday. The relevant dates this year are Dec. 13 and Dec. 23.
Palantir is the largest Nasdaq-listed company not currently in the Nasdaq-100. So, the reconstitution announcement due on Dec. 13 will almost certainly include news of Palantir's inclusion in the index on Dec. 23. If that happens, history says the stock could soar during the next 12 months.
Stocks added to the Nasdaq-100 in the last decade returned an average of 17% during the next year
The Nasdaq-100 is widely regarded as a benchmark for growth stocks, especially those in the technology sector. During the decade between 2014 and 2023, 85 companies joined the Nasdaq-100, and their share prices appreciated by an average of 17% during the 12-month period following their inclusion.
Here's why that matters: If Palantir is added to the Nasdaq-100 later this month, history says the stock could soar 17% through December 2025. Of course, investor should never assume past performance will correlate with future returns, but there is some logic to that prediction.
Index products have to buy: If Palantir is named to the Nasdaq-100 on Dec. 13, every investment product that tracks the index will need to buy the stock before Dec. 23. That would put upward pressure on the share price. Indeed, the Invesco QQQ Trust (which tracks the Nasdaq-100) ranks among the five most popular index funds in terms of assets under management.
Palantir has momentum: There is another reason to think Palantir stock will soar following its inclusion in the Nasdaq-100. Every headline sends the price higher. In September, Palantir shares soared 14% in one day on news of its inclusion in the S&P 500. In November, the stock soared 11% in a single day when the company said it would relist on the Nasdaq Exchange.
Importantly, while I believe Palantir will be added to the Nasdaq-100 and that shares will soar following the announcement on Dec. 13, that prediction comes with an important catch. I also think the stock is headed for a serious downward correction at some point in the future because the valuation is unsustainable.
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Palantir is a leader in artificial intelligence platforms, but the stock is unreasonably expensive
Palantir specializes in data analytics and artificial intelligence (AI) software. Its Foundry and Gotham products let commercial organizations and government agencies integrate complex data and machine learning (ML) models into analytical applications that improve decision-making. But AIP transformed the business following its release last year.
AIP stands for artificial intelligence platform. That product brings support for large language models to Gotham and Foundry, which empowers customers to apply generative AI to their operations. Importantly, Forrester Research recently recognized Palantir as a leader in AI/ML platforms, a market forecast to grow at 41% annually through 2028, according to the International Data Corp.
That bodes well for Palantir's business, but not even the best business is worth buying at any price. Wall Street expects Palantir's adjusted earnings to grow at 27% annually through 2025. That estimate makes the current valuation of 220 times adjusted earnings look unreasonable by any standard. It would be hard to rationalize even if earnings were projected to grow at 50% annually.
Indeed, among the 20 analysts following Palantir, the median 12-month target price is $38 per share, which implies 50% downside from the current price of $76.50 per share. Median refers to the middle value, which means half of analysts think the stock will plunge more than 50% in the next year.
In fact, even the highest price target of $75 per share implies 2% downside. That means every last analyst following Palantir thinks the stock is overvalued right now. That is a pretty good reason to avoid the stock, even though I think shares will soar following the company's likely addition to the Nadaq-100 later this month.
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Trevor Jennewine has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
