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Why Palantir Technologies Stock Rallied on Monday

Source The Motley Fool

Palantir Technologies (NASDAQ: PLTR) stock charged higher on Monday, climbing as much as 7.1%. As of 2:03 p.m. ET, the stock was still up 5%.

The catalyst that sent the artificial intelligence (AI) software and data mining specialist higher was its addition to an elite group of stocks.

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The S&P 100

The S&P 500 (SNPINDEX: ^GSPC) is the most widely acknowledged benchmark for the U.S. stock market, consisting of the 500 biggest companies in the country. The S&P 100 is a subset of those stocks, made up of the 100 largest companies in the index. Palantir joined the ranks of this elite group on Monday to coincide with indexes' quarterly rebalancing.

While this might seem much ado about nothing, there are certain benefits to being admitted to the benchmark. The move will likely attract the attention of hedge funds and institutional investors, generating additional demand for the stock. Furthermore, exchange-traded funds (ETFs) that track the index will be forced to buy shares of Palantir, as their holdings mirror that of the index.

On the other hand, any so-called "index effect," which boosts the stock price over the short term, tends to diminish over time as investors focus on revenue growth and profitability.

Strong financials for Palantir

Palantir continues to make impressive strides in that department. In the fourth quarter, revenue of $828 million grew 36% year over year, while its adjusted earnings per share (EPS) of $0.14 surged 75%. The impressive growth was fueled by a rapid increase in customers and robust demand for the company's Artificial Intelligence Platform (AIP), which uses company-specific data to help management make data-driven decisions.

If there's one drawback associated with Palantir, it would have to be the company's valuation, which isn't for the faint of heart. It currently sells for 171 times forward earnings and 47 times forward sales, so Palantir isn't cheap. That said, the stock's recent decline brought its forward price/earnings-to-growth (PEG) ratio -- which factors in the company's impressive growth -- to 0.9, when any number less than 1 suggests a stock that is fairly valued.

Given the recent sell-off and strong runway for growth ahead, it might finally be time to start looking at Palantir.

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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.

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