The Nasdaq is home to many of the best growth stocks in the world. But to join the Nasdaq 100 index is particularly exclusive, since as the name implies, it contains the top 100 (nonfinancial) stocks on the exchange. There was a rebalancing in December that resulted in three stocks being added to the index: Axon Enterprise, Palantir Technologies (PLTR -2.01%) and MicroStrategy (MSTR -4.40%).

While all three stocks have more than doubled in value in 2024, I'm going to take a closer look at the latter two, which amassed gains of well over 300% and are some of the hottest stocks with retail investors. Will their additions to the Nasdaq 100 help lift Palantir and MicroStrategy to new heights in 2025?

Palantir Technologies

Palantir is an extremely popular stock with retail investors, and its valuation has soared in 2024 at an incredible pace. Its gains totaled 340%.

The company is involved in data analytics and provides governments with valuable counterterrorism services. What has lit a fire under the business, however, is the promise of its artificial intelligence (AI) solutions, which can help governments and commercial customers. With many uses and potential industries it can add value to, investors are more than willing to pay a hefty premium for the tech stock.

Its growth rate has been accelerating and came in at 30% for the period ending Sept. 30, 2024. When CEO Alex Karp talks about "AI demand that won't slow down," he's helping feed that excitement and bullishness around the stock. But my concern is that he's also creating some incredibly high expectations by doing so.

The company has come a long way in becoming consistently profitable and growing its bottom line, but investors shouldn't ignore its valuation. While Palantir is growing quickly, it's hard to make the case that it's a good buy when you're paying a multiple of 161 times next year's profits for a piece of the business.

Inclusion in the Nasdaq 100 is a great achievement for the company, but it's the hype from retail investors that will likely determine the stock's path in 2025. Its fundamentals aren't strong enough to support this kind of valuation on their own, which is why I would avoid the stock, regardless of how hot it may appear to be.

MicroStrategy

MicroStrategy is one stock that has been even hotter than Palantir in 2024, surging close to 400% as of last Friday's close. It also has done so not through the strength of its fundamentals but due to the excitement from retail investors and crypto enthusiasts. The company is bullish on Bitcoin and prides itself on being the largest corporate holder of bitcoins.

Unlike Palantir, MicroStrategy isn't even growing. It's technically a software company, but its sales declined by 10% during its most recent quarter (also ended Sept. 30, 2024).

The provider of AI-powered business intelligence solutions isn't seeing demand for its core products and services rise. But because it has been racking up bitcoins, investors are bullish on it. After all, if Bitcoin hits a value of $1.5 million or higher, as ARK Invest's Cathie Wood predicts could happen by 2030, then MicroStrategy's plan to load up on bitcoins could look brilliant in the not-too-distant future.

The danger with that approach is that cryptocurrencies are highly volatile, and their movement will depend a lot on retail sentiment and government legislation as well. The stock could continue thriving in 2025, but it likely won't be because it was added to the Nasdaq 100 index or because sales are suddenly taking off, but rather that Bitcoin hits new highs (assuming it continues to go higher, of course). Given how intertwined the stock has become with the cryptocurrency, it's likely that MicroStrategy will follow in Bitcoin's path.

Investors should be very careful with this stock because it trades like a cryptocurrency, and there's a lot of volatility that comes with that. If the excitement around crypto starts to cool, MicroStrategy could be due for a big decline -- it's trading at a whopping 4,100 times its trailing earnings.