Palantir Technologies(PLTR 1.56%) has been one of the top-performing stocks this year. The company’s strong results led to the stock’s inclusion on the S&P 500, and now it has moved to the Nasdaq stock exchange, where it could soon join the even more exclusive Nasdaq 100 index.
Could this become yet another catalyst that pushes this high-powered artificial intelligence (AI) stock even higher?
Why the move could be hugely positive for Palantir’s stock
At first glance, Palantir’s move from the New York Stock Exchange to Nasdaq may not seem like a big move since many top growth stocks are on both exchanges.
But what has investors excited is the potential for it to be added to the Nasdaq 100 index, which contains the largest nonfinancial stocks on the exchange. And with many stocks on the Nasdaq 100 trading with market caps of less than $100 billion, it should be a slam dunk for Palantir, which is worth more than $145 billion, to make it onto the index.
That’s significant because if it’s in the index, it will mean the stock is included in more exchange-traded funds and portfolios. All that buying could inevitably send the stock’s value even higher. The addition to the index will also be a great sign of the data analytics company’s mammoth success over the years, and validation of its efforts and strong growth.
As a top technology and AI stock, Palantir could also become more popular with anyone who may not be that familiar with its business. It’s hard to imagine many investors not being aware of one of the hottest growth stocks on the markets this year, but being on a highly recognizable index can attract even more attention to Palantir.
Why it’s not a lock for Palantir to continue rallying higher
While more investors may notice Palantir, what many of them will also pay close attention to is the stock’s extremely high valuation. With such a massive market cap, the stock is trading at 58 times the revenue it has generated over the past 12 months and more than 320 times the profit it posted. There’s no valuation multiple that stands out with Palantir that can help justify its current price tag.
Many investors appear to be willing to buy it solely for the expectation that it will go higher, just because it is a hot AI stock. It’s a speculative reason and perhaps one of the best examples of the Greater Fool Theory in effect right now.
But attention can be both positive and negative. And as Palantir crosses more investors’ radars and they notice its high valuation, their only move isn’t necessarily to buy the stock. They could short it as well — and short interest in Palantir has been picking up of late.
PLTR percent of float short; data by YCharts.
Short interest has been coming down in recent years as the company has turned a profit and accelerated its growth. But now, with its valuation spiking to egregious levels, short-selling has been rising again, and it wouldn’t be surprising to see more investors bet against Palantir in the near future.
And by adding such a highly priced stock into the Nasdaq 100, the index becomes more expensive, which could turn some investors away.
So don’t assume that by gaining more visibility, Palantir will generate surefire gains for those who buy it today.
Ignore Palantir’s extreme valuation at your own risk
Although the company looks to be proving every doubter wrong these days with its soaring share price, the danger is that anyone buying the stock without regard for its fundamentals could be left holding a very expensive bag.
Palantir’s business is doing well; there’s no question about that. But when put into context with its earnings and revenue numbers, the valuation just doesn’t make any sense at this point.
And when that happens, you’re in risky territory because all it may take is for one domino to fall — whether it’s in the tech sector or the AI world, or an underwhelming earnings report from the company — and shares of this highly valued stock could quickly come crashing down.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
