Block Inc (NYSE: SQ) & Palantir (PLTR) Eyeing S&P 500 Inclusion

As Wall Street gears up for the next quarterly rebalance of the iconic S&P 500 taking place on June 21st (decision date 7th June), attention turns to the companies poised for inclusion in the prestigious index. Inclusion in the S&P 500 requires more than just a large market capitalization. According to S&P guidelines, companies must demonstrate a “history of positive earnings” and meet specific liquidity and size criteria.

However, a single profitable quarter is not enough. The S&P Global criteria emphasize the need for a sustained history of profitability, rather than a singular profitable quarter.

Analysts from Barclays point to Block Inc. (NYSE: SQ), the financial technology company steered by Twitter co-founder Jack Dorsey, as a potential new entrant. If their predictions hold, Block Inc. could soon join the ranks of the most widely followed stock indices in the United States.

Block Inc., formerly known as Square, has positioned itself as an eligible contender for the S&P 500 through solid financial performance. The company's spotlight achievement was securing a positive net income of $178 million in the fourth quarter of 2023. The profitability streak extended throughout the last twelve months, culminating in an approximate total net income of $125 million.

Continuing its upward trajectory, Block Inc. reported an impressive $472 million in net income in the first quarter of the year. This leap in earnings underlines its readiness to meet the S&P 500's stringent inclusion criteria.

Although inclusion is far from a certainty, Barclays' analysis concludes that Block Inc.'s stock (NYSE: SQ) “screens well” for entry into the index. The firm’s assessment also suggests that Block Inc. might bridge the underrepresentation in the “Financial Services” sector. Considering that Financial Services ranks as the second most underweight industry category in the S&P 500, Block Inc.’s substantial $45 billion market capitalisation places it in a favorable light for consideration.

Moreover, dynamics beyond regular index rebalancing could play a role in welcoming Block Inc. into the S&P 500 fold. Mergers and acquisitions within the index frequently create spots that need to be filled expeditiously—another window of opportunity for Block Inc.

As historical data suggests, companies making their S&P 500 debut usually enjoy a 7.7% bump in their stock value leading up to their inaugural trading day as a member of the index. However, this initial surge is typically tempered by a subsequent average decline of 1.0% in the proceeding four weeks.

The Case For Palantir

Palantir was initially considered for inclusion in the S&P 500 following the release of its Q4 2023 financial results last earnings season.

During Q4 2023, Palantir reported outstanding earnings, marking its first profitable quarter. The company announced a positive GAAP income exceeding $30 million on February 13th, which led to a nearly 20% surge in its stock prices.

In most recent Palantir earnings, the firm again delivered profitability. As we mentioned in our post just after earnings, earnings not only exceeded expectations but PLTR raised its full-year sales guidance to $2.689 billion, surpassing analyst projections. There was also an upward adjustment in the guidance for adjusted income from operations for the entire year.

In anticipation of the second quarter, Palantir is projecting sales in the range of $649 million to $653 million, yet again, exceeding analyst estimates. The adjusted earnings for the first quarter stood at $0.08 per share, with an impressive revenue increase of 20.8% year-over-year, amounting to $634.33 million (against expectations of $625million).

So how do the two compare on key metrics?

With the June rebalance around the corner, market participants will be closely monitoring Block Inc., and Palantir for potential changes in its stock trajectory. Entry into the S&P 500 is more than a symbolic gesture; it often brings with it a broader investor base, increased visibility, and an affirmation of a company's solid standing in its sector. Whether either of these companies will be the next to join this elite group remains a matter of speculation until the official announcement is made.