Palantir's Chief Executive is Offloading Shares; Should Shareholders Adopt a Similar Strategy?
Palantir Technologies (PLTR dropping by 1.80%) has been one of the market's hottest stocks this year, with a skyrocketing increase of over 246% since the beginning of the year, as of now.
CEO Alex Karp reveled in his company's latest financial results, declaring they were so impressive that he felt like "calling it a day." He also took a dig at his detractors who questioned his sanity for making such a comment.
Despite Karp's enthusiasm over his company's success and its soaring stock price, he's been actively selling off Palantir shares. This raises the question, should investors mimic Karp's actions and sell Palantir shares?
Boost in insider Palantir share selling
Karp has been a consistent market seller of Palantir shares since late 2020, employing what's known as a Rule 10b5-1 plan. Under these plans, company officials and other insiders set up brokers to sell shares based on various conditions. These could range from selling a fixed number of shares on specific dates regardless of the price, to more complex triggers.
Karp seems to be utilizing a more intricate set of triggers, which have led to a significant surge in selling by the CEO in the past few months. All of these recent sales have been through the exercise and subsequent sale of stock options.
Karp's increased selling started in mid-September, when he exercised options and sold 9 million shares at an average price of $36.18, equating to $325.6 million.
Right before earnings, he exercised options and sold an additional 5.66 million shares at an average price of $45.01, pocketing $254.6 million. Then, immediately after earnings, he exercised options and sold over 12.3 million shares at an average price of $52.71, yielding proceeds of $650.6 million.
Before the boost in sales, Karp's transactions were typically around $15 million to $22 million.
Karp wasn't the only insider to sell shares after earnings. Chief Accounting Officer Heather Planishek and Director Lauren Friedman Stat also sold shares through Rule 10b5-1 plans.
This isn't the first time Palantir has witnessed substantial insider selling. Chairman Peter Thiel set up a Rule 10b5-1 plan and disposed of over 28.5 million shares in September and early October.
Should investors follow Palantir's Karp and sell shares?
Without a doubt, Palantir is an exceptional company. It first made a name for itself by offering data collection and analytical services to the U.S. government, aiding in crucial tasks like counter-terrorism and tracking COVID-19 cases. It has since emerged as a key artificial intelligence (AI) player, with the U.S. commercial sector now integrating its AI platform.
Palantir's heavy investment in AI for the commercial sector has resulted in accelerating revenue growth, with revenue growing by 30% year over year during the last quarter. This marked the company's fifth consecutive quarter of revenue growth acceleration, showcasing the strength of its solutions. The U.S. commercial sector drove the most revenue growth, with an impressive 54% increase, while excluding strategic commercial contracts. U.S. government revenue, meanwhile, saw a 40% surge year over year, indicating that even the government has begun to adopt its AI solutions.
Currently, the company is excelling in both attracting new customers and expanding its reach with existing customers. However, the biggest challenge surrounding Palantir shares is its valuation. Following the recent price surge, the stock now has a forward P/S ratio of 41 times 2025 analyst forecasts.
For a stock growing its revenue around 30%, that valuation is quite extreme. While Palantir is an outstanding company, valuation is still an essential factor to consider. Alex Karp seems to acknowledge this, prompting him to accelerate his share selling over the past few months.
Just in August, I argued that it wasn't too late to buy Palantir shares. Following the current surge in price, I'm reconsidering my stance. It might be wise to follow the actions of Karp and other insiders, and take some profits from the stock after such a successful run.
Given Karp's significant selling of Palantir shares using a Rule 10b5-1 plan and the recent surge in the stock's price, some investors might consider following suit, as the stock's forward P/S ratio of 41 times 2025 analyst forecasts is considered quite extreme for a company growing its revenue around 30%.
This strategy of selling shares, also employed by other key insiders like Chief Accounting Officer Heather Planishek and Director Lauren Friedman Stat, suggests that they believe the current stock price might be overvalued, which could warrant taking profits to secure potential future gains.
