The people who know Nvidia and Palantir best issue a $9.3 billion warning to Wall Street | Colorful fool

Roughly three decades ago, the advent and spread of the Internet began to change the growth trajectory of corporate America forever. This technology opened up sales channels that did not exist before and also started a retail investor revolution.

After three decades, another game-changing technology on par with the Internet is set to revolutionize the world. The arrival of artificial intelligence (AI) comes with an enticing addressable market and some stunning gains for Wall Street’s most popular AI stocks. Nvidia (NVDA 3.68%) after the start of 2023, it reached $5 trillion with a market cap of $360 billion, while the stock Palantir Technologies (PLTR 6.84%) they are up nearly 2,900% over the same timeline!

But while growth estimates suggest neither company can be stopped, the people who know Nvidia and Palantir best seem to have a different (and troubling) message for Wall Street.

Nvidia and Palantir’s competitive advantages have led to stunning returns

Let me preface any further discussion by pointing out that Nvidia and Palantir’s monumental gains since early 2023 aren’t just based on hype. Both companies have tangible competitive advantages that have fueled their impressive growth rates — and there’s an above-average chance they’ll maintain those competitive advantages for the foreseeable future.

For example, Nvidia’s graphics processing units (GPUs) are absolutely dominant in AI-accelerated data centers. In addition to being the preferred choice of enterprises running high-computing data centers, Nvidia’s three generations of AI-GPUs (Hopper, Blackwell and Blackwell Ultra) offer superior computing capabilities compared to external chips.

With Nvidia generating a lot of operating cash flow from its AI hardware, CEO Jensen Huang is spearheading new product development. Specifically, Huang is trying to launch a new chip with advanced AI every year, which is an aggressive goal. If successful, it should cement Nvidia as the clear leader in AI-accelerated data center computing.

Today’s Change

(-3.68%$-7.19

Current price

$188.02

Key data points

Market capitalization

4570 billion dollars

Daily range

$186.39 -$197.60

Range 52 weeks

$86.62 -$212.19

Volume

7.4 million

Avg. flight

179 million

Gross margin

69.85%

Dividend yield

0.00%

While this is a point that was made earlier, the value of Nvidia’s CUDA platform cannot be overlooked. CUDA is a toolkit that developers rely on to build and train large language models, as well as get the most out of their Nvidia GPUs. This platform has played an important role in keeping customers in the Nvidia ecosystem.

Meanwhile, Palantir’s success is a function of providing AI-driven software-as-a-service platforms that have no substitute. Historically, Wall Street has richly rewarded businesses that have sustainable assets.

Palantir’s Gotham platform is its most profitable. It is a tool used by the US government and its allies to plan and oversee military operations, as well as collect data. Palantir often secures multi-year contracts from the US government and its allies, leading to transparent growth and operating cash flow.

Its other main operating segment, Foundry, is a bit newer and growing at a breakneck pace. Foundry helps businesses better understand their data to make their operations (such as supply chain) more efficient.

Insiders offer a cautionary tale for Wall Street’s AI darlings

Although all the ducks seem to be in a perfect row, insiders at Nvidia and Palantir paint a different picture.

An “insider” is a senior executive, individual on the board of directors or a beneficial owner with at least 10% of a public company that may have non-public information. In the name of transparency, insiders are required to file a Form 4 with the Securities and Exchange Commission (SEC) no later than two business days after any trades are executed. This means that whenever an insider buys or sells stock in their company, or even exercises options, it must be reported to the SEC via a Form 4.

While not all of the sacred activities are meaningful, sometimes they can tell quite a story.

In the case of Nvidia and Palantir, the title of the hypothetical book to be written would be “Selling”, with each chapter labeled as a “bestseller”. Over the past two years, as of Nov. 4, the net selling activity of Wall Street’s AI darlings has reached:

• Nvidia: $4.04 billion
• Palantir Technologies: $5.22 billion

The insiders of two of the hottest AI stocks on the planet have combined to dump nearly $9.3 billion in their own company’s stock since November 4, 2023.

Today’s Change

(-6.84%$-12.85

Current price

$175.05

Key data points

Market capitalization

415 billion dollars

Daily range

$174.53 -$191.09

Range 52 weeks

$55.30 -$207.52

Volume

78 million

Avg. flight

62 million

Gross margin

80,81%

Dividend yield

ON

One caveat that is absolutely necessary to mention when discussing insider selling is that it is not inherently bad. Since most of Nvidia’s and Palantir’s executives and board members receive the lion’s share of their compensation in the form of stock and/or options, these individuals may need to exercise options and sell stock to cover their federal and/or state tax liability. Selling shares to cover a tax liability or to diversify an investment portfolio is not as bad news as it might seem on the surface.

What might be even more telling is the other side of the coin: insider buying. While there are many reasons to sell stocks (not all of them bad), there is only one reason for insiders to buy stocks – the belief that they will increase in value.

Excluding beneficial owners, there has not been a single insider purchase of Nvidia stock since December 2020, and only one for Palantir since the company went public on September 30, 2020, totaling $1.16 million.

This continued insider selling activity, coupled with virtually non-existent buying activity, comes at a time when both stocks are historically expensive. Time-tested price-to-sales (P/S) ratios tell us that P/S ratios north of 30 for market-leading companies have never been sustainable over the long term. Nvidia recently surpassed a P/S ratio of 30, while Palantir topped a P/S ratio of 152 before releasing its third quarter operating results earlier this week.

While it is possible that most of these insider sales may be pre-planned and tax based, the optics are not good. Historically expensive stocks with little/zero insider buying serve as a warning to Wall Street and investors.