What happened

Shares of Medallia (NYSE:MDLA) jumped on Friday after a filing with the Securities and Exchange Commission disclosed that a director of the software-as-a-service company had bought a substantial number of shares. The stock was up about 21.5% at 11:55 a.m. EDT.

So what

Director Douglas Leone bought nearly 400,000 shares of Medallia between Sept. 10 and Sept. 11, paying around $11 million. Those purchases account for his entire direct stake in the company, although he has an indirect stake through Sequoia Capital, where he is the managing partner.

A rising chart.

Image source: Getty Images.

Shares of Medallia crashed on Monday along with many other cloud software stocks. Leone paid around $28 per share for his stake; the stock was trading close to $35 at the end of last week.

An insider buying shares, especially a substantial quantity, is often a sign that that insider has confidence that the stock is set to rise.

Now what

While this insider purchase has helped Medallia stock claw back some of its losses, the stock remains expensive. Medallia is now valued at roughly $3.9 billion, about 10 times the average analyst estimate for fiscal 2020 sales. The company is deeply unprofitable under generally accepted accounting principles, and revenue grew only 27% in its latest quarter. That's not all that fast compared to other high-flying SaaS companies.

With the stock still sporting a generous valuation, more volatility could be ahead.