Roughly three decades ago, the advent and proliferation of the internet began altering the growth trajectory of corporate America forever. This technology opened sales channels that previous didn't exist, as well as kicked off the retail investor revolution.
After three decades, the next game-changing technology on par with the internet aims to revolutionize the world. The arrival of artificial intelligence (AI) comes with a mouthwatering addressable market, and some jaw-dropping gains for Wall Street's most beloved AI stocks. Nvidia (NVDA +5.59%) has crested a $5 trillion valuation after beginning 2023 with a $360 billion market cap, while shares of Palantir Technologies (PLTR +6.35%) have surged close to 2,900% over the same timeline!
But while growth estimates suggest neither company can be stopped, the people who know Nvidia and Palantir best appear to have a different (and worrisome) message for Wall Street.
Image source: Getty Images.
Nvidia's and Palantir's competitive edges have led to jaw-dropping returns
Let me preface any further discussion by pointing out that Nvidia's and Palantir's monumental gains since the start of 2023 aren't based solely on hype. There are tangible competitive advantages for both companies that have fueled their impressive growth rates -- and there's a better than average chance they're going to sustain these competitive edges for the foreseeable future.
For instance, Nvidia's graphics processing units (GPUs) are absolutely dominant in AI-accelerated data centers. On top of being the preferred choice by businesses operating high-compute data centers, Nvidia's three generations of AI-GPUs (Hopper, Blackwell, and Blackwell Ultra) have offered superior compute capabilities when compared to external chips.
With Nvidia generating boatloads of operating cash flow from its AI hardware, CEO Jensen Huang is leading the charge on new product development. Specifically, Huang is attempting to introduce a new AI-advanced chip to market every year, which is an aggressive goal. If successful, it should cement Nvidia as the clear leader in compute capabilities in AI-accelerated data centers.
NASDAQ: NVDA
Key Data Points
Though it's a point that's been touched on before, the value of Nvidia's CUDA platform can't be overlooked. CUDA is the toolkit relied on by developers to build and train large language models, as well as to get the most out of their Nvidia GPUs. This platform has played an important role in keeping customers within Nvidia's ecosystem.
Meanwhile, Palantir's success is a function of providing AI-driven software-as-a-service platforms that have no one-for-one replacement. Historically, Wall Street has handsomely rewarded businesses that have sustainable moats.
Palantir's Gotham platform is its most profitable. This is the tool used by the U.S. government and its allies to plan and oversee military operations, as well as to collect data. Palantir often secures multiyear contracts from the U.S. government and its allies, which leads to transparent growth and operating cash flow.
Its other core operating segment, Foundry, is a bit newer and growing at a breakneck pace. Foundry helps businesses better understand their data to make their operations (e.g., supply chain) more efficient.
Image source: Getty Images.
Insiders offer a cautionary tale for Wall Street's AI darlings
Though all ducks appear to be in a perfect row, insiders at Nvidia and Palantir have been painting a different picture.
An "insider" is a high-ranking executive, individual on the board of directors, or beneficial owner with at least a 10% stake in a public company who may possess non-public information. In the name of transparency, insiders are required to file Form 4 with the Securities and Exchange Commission (SEC) no later than two business days after making any trades. This means any time an insider purchases or sells shares of their company, or even exercises options, it must be reported to the SEC via Form 4.
While not all insider activity is meaningful, sometimes it can tell quite the story.
In the case of Nvidia and Palantir, the title of the hypothetical book to be written would be "Sell," with every chapter labeled as "more selling." Over the trailing-two-year period, as of Nov. 4, net-selling activity for Wall Street's AI darlings has totaled:
- Nvidia: $4.04 billion
- Palantir Technologies: $5.22 billion
Collectively, insiders at the two hottest AI stocks on the planet have dumped close to $9.3 billion of their own company's stock since Nov. 4, 2023.
NASDAQ: PLTR
Key Data Points
One of the caveats that absolutely needs to be mentioned when discussing insider selling is that it's not inherently bad. Since most executives and board members at Nvidia and Palantir 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 stock to cover tax liability, or to diversify an investment portfolio, isn't the bad news it might appear to be on the surface.
What might be even more telling is the other side of the coin: insider buying. While there are numerous reasons to sell stock (not all of which are bad), there's only one reason for an insider to purchase shares -- the belief they'll increase in value.
Excluding beneficial owners, there hasn't been a single insider purchase of Nvidia stock since December 2020, and there's been just one for Palantir, totaling $1.16 million, since the company went public on Sept. 30, 2020.
This ongoing selling activity by insiders, coupled with virtually nonexistent purchasing activity, comes at a time when both stocks are historically expensive. The time-tested price-to-sales (P/S) ratio tells us that P/S ratios north of 30 for market-leading companies have never been sustainable over long periods. Nvidia recently topped a P/S ratio of 30, while Palantir surpassed a P/S ratio of 152 prior to releasing its third-quarter operating results earlier this week.
While it's possible that a majority of these insider sales may be preplanned and tax-based, the optics aren't good. Historically pricey stocks with minuscule/zero insider buying serve as a warning for Wall Street and investors.
