Every December the Nasdaq quietly decides which large companies will sit within its growth-focused index, and this year the spotlight falls on Palantir, a data and artificial intelligence firm that has climbed far faster than almost anyone expected. Having moved its listing from the New York Stock Exchange to the Nasdaq, it now stands as the largest company on that exchange still outside the index, and its inclusion, announced after the close on December 13, seems close to certain. A Motley Fool columnist sees a likely short-term lift from both the historical pattern of such additions and the
Palantir May Soar on Nasdaq-100 Inclusion, but Analysts See Overvaluation Risk
Not even the best business is worth buying at any price.
Mark
Why does a spot in the Nasdaq-100 matter so much for one stock?
Mimi
Because of the funds. Anything that tracks the index has to own the new member, so they must buy Palantir before Dec. 23. The Invesco QQQ Trust is one of the five biggest index funds by assets.
Mark
And the history backs that up?
Mimi
The author says 85 companies joined between 2014 and 2023 and averaged a 17% gain over the next year. He adds that past results don't guarantee anything.
Luke
I'd hold that 17% loosely. It's an average across many companies, and the column doesn't say how widely the results varied. Nothing in it says Palantir will land near that figure.
Mark
Is the inclusion itself certain?
Luke
No. The column says it's almost certain because Palantir is the largest Nasdaq-listed company outside the index. That's the author's expectation. Nasdaq hasn't announced anything yet as of this writing.
Mimi
And the stock already reacts to headlines. It rose 14% in one day on the S&P 500 news and 11% on the relisting news.
Mark
Then why does he say to avoid it?
Mimi
Valuation. The stock trades at 220 times adjusted earnings against expected growth of 27% a year. The median analyst target of $38 is about half the $76.50 price.
Luke
Keep in mind those targets are one set of estimates from 20 analysts, and analysts are often wrong. Also, this is an opinion piece by someone who owns the stock. The correction is a prediction, with no date attached.
Der Puls
- Palantir's shares have surged 345% this year, and the stock now trades at roughly 220 times adjusted earnings, a gap that sets off alarm bells for skeptics.
- A Nasdaq-100 announcement due December 13 could force index funds to buy shares before the December 23 effective date, injecting fresh demand into an already-hot stock.
- Past additions to the index have averaged a 17% gain over the following year, giving bulls a historical reason to expect the rally to continue.
- The median analyst price target of $38 sits about 50% below the $76.50 share price, and even the highest target falls short of the current price.
- The columnist expects shares to rise on the news but would stay away at this valuation, so the real test is whether any rally can survive the widening gap.
Every December the Nasdaq quietly decides which large companies will sit within its growth-focused index, and this year the spotlight falls on Palantir, a data and artificial intelligence firm that has climbed far faster than almost anyone expected. Having moved its listing from the New York Stock Exchange to the Nasdaq, it now stands as the largest company on that exchange still outside the index, and its inclusion, announced after the close on December 13, seems close to certain. A Motley Fool columnist sees a likely short-term lift from both the historical pattern of such additions and the mechanical buying that index funds must perform, yet he also senses that the company's price has drifted well beyond what its earnings can support. The moment captures a familiar tension in markets, where enthusiasm for a promising future can briefly outrun the arithmetic of the present.
On December 13, after the market closes, Nasdaq is expected to announce the companies joining its Nasdaq-100 index, and Palantir Technologies is widely expected to be among them. It is the largest company on the exchange not yet in the index, a fact that has made its inclusion look almost inevitable. Motley Fool columnist Trevor Jennewine believes the news will push the stock higher, though he also believes its price has run far ahead of its fundamentals.
The path here began last month, when Palantir moved its listing from the New York Stock Exchange to the Nasdaq and said it expected to meet the index's criteria. The company arrives with considerable momentum. Its shares are up 345% this year, and earlier index news has already moved the stock sharply, including a 14% jump in September on word of S&P 500 inclusion and an 11% rise in November after its Nasdaq move.
Jennewine sees two forces that could lift the price again. History suggests that companies added to the index between 2014 and 2023 gained an average of 17% over the following year, though he notes past results guarantee nothing. Mechanically, index-tracking funds such as the Invesco QQQ Trust must buy the shares before the December 23 effective date. The business behind the rally is real: its Foundry, Gotham and AIP products bring data analytics and generative AI to companies and governments, and Forrester has named it a leader in its field.
The unease lies in the price. Analysts expect adjusted earnings to grow 27% a year through 2025, yet the stock trades at 220 times those earnings, a multiple Jennewine considers hard to justify even at 50% annual growth. The median of twenty analyst targets is $38, and the highest is $75, both below the current $76.50. Jennewine expects a serious correction eventually, and though he predicts a near-term bump, he would not buy at this level. The column is an opinion piece, and its author discloses that he owns shares. What to watch is whether the December 13 announcement can carry the stock past the wide gap between its price and the targets set against it.
On Dec. 13, after the market closes, Nasdaq is due to announce which companies will join its Nasdaq-100 index. Palantir Technologies is widely expected to be on the list. The company is the largest Nasdaq-listed business that is not already in the index, and a Motley Fool columnist, Trevor Jennewine, argues that its inclusion will probably push the stock higher. He also argues the price is far ahead of the fundamentals.
The setup began last month, when Palantir moved its listing from the New York Stock Exchange to the Nasdaq. The company said it expected to meet the eligibility criteria for the Nasdaq-100, a growth-focused index of the 100 largest non-financial companies on the exchange. The index is reconstituted every December. Additions and deletions are announced after the close on the second Friday of the month, and the changes take effect on the first trading day after the third Friday. This year those dates are Dec. 13 and Dec. 23.
Palantir arrives with considerable momentum. Its shares are up 345% so far in 2024, which makes it the best performer in the S&P 500 this year. The company has posted encouraging financial results, and investors are enthusiastic about its place in the growing AI economy. News about index membership has already moved the stock. In September it jumped 14% in a single day on word that it would join the S&P 500. In November it rose 11% in one day when it said it would relist on the Nasdaq.
Jennewine points to two reasons the Nasdaq-100 announcement could lift the price again. The first is history. From 2014 through 2023, 85 companies joined the index, and their shares gained an average of 17% over the following 12 months. He cautions that past performance does not guarantee future returns. The second is mechanical. Every investment product that tracks the index would need to buy Palantir before Dec. 23, which puts upward pressure on the price. The Invesco QQQ Trust, which follows the Nasdaq-100, is among the five largest index funds by assets under management.
Then comes the catch. Jennewine believes the stock is headed for a serious correction at some point because its valuation is unsustainable. The business itself is strong. Palantir makes data analytics and AI software. Its Foundry and Gotham products let companies and government agencies bring complex data and machine learning models into tools for decision-making. Its AIP platform, released last year, adds large language model support to both products, so customers can apply generative AI to their operations. Forrester Research recently named Palantir a leader in AI and machine learning platforms, a market that International Data Corp. forecasts will grow 41% a year through 2028.
The price is the problem. Wall Street expects Palantir's adjusted earnings to grow 27% a year through 2025, yet the stock trades at 220 times adjusted earnings. Jennewine says that would be hard to justify even with 50% annual growth. Among the 20 analysts who follow the company, the median 12-month price target is $38, about 50% below the recent price of $76.50. The highest target, $75, is still 2% below that price. In his reading, every analyst covering the stock thinks it is overvalued today.
His conclusion is split. He expects the Nasdaq-100 news to send shares higher, but he would avoid the stock at this price. This is an opinion column, and the author discloses that he holds Palantir shares. What to watch is the Dec. 13 announcement, and whether any rally after it can hold against such a wide gap between the share price and analysts' targets.
Bemerkenswerte Zitate
He expects shares to rise after the Dec. 13 announcement but believes the valuation is unsustainable and a serious correction will come.— Trevor Jennewine, The Motley Fool
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