Editor's note: The number of shares Alex Karp owned at the end of 2024 has been corrected in this article.
Palantir (PLTR 1.72%) has been on an incredible run since the start of 2024. At its peak, Palantir's stock had risen 625% since the start of 2024, but that number took a hit when CEO Alex Karp recently announced plans to sell up to roughly 10 million shares, which would be worth about $1 billion at the closing price from Feb. 21.
Many investors interpret insider selling as a red flag, as insiders have far more information than outside investors. However, there could be more to the story, and investors must consider multiple factors when a leadership team decides to sell shares.
This is only a fraction of Karp's total Palantir holdings
Famed investor Peter Lynch has a well-known quote, "Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise." This rings true today, as investors need to consider all the facts.
Just because Karp decides to sell doesn't mean he thinks the stock price will fall. He could be using those funds for any number of reasons. Regardless, this isn't Karp's full amount of shares.
I don't have access to the latest amount of shares that Karp owns, so I'll have to use the 2024 filing for that information. Palantir has three classes of shares, each with different voting power. But they are all valued the same. Altogether, Karp owned 98.5 million shares, according to the 2024 informatoni. According to the selling plan, Karp is going to sell up to 9.975 million shares of Class A stock. So, even with 2024's ownership figures (we know based on compensation that Karp owns more now than he did in 2024), he'd only be selling around 10% of his entire Palantir stake.
If he were selling 100% of his shares, that would be an obvious red flag. But he's not. And we have no idea why Karp is selling.
Still, this raises the question: Should investors do some selling themselves?
Palantir's stock is very expensive
After a run like Palantir's, many investors are sitting on huge gains. If you haven't sold any stock, you may consider trimming some back like Karp is doing, especially when you consider where Palantir is trading.
Palantir's stock has attained an unbelievably high valuation: It currently trades for 91 times sales and 192 times forward earnings.
PLTR PS Ratio data by YCharts
There is no way to state that that valuation is anything other than expensive, and I'd argue that it's not even justifiable. If Palantir were doubling or tripling its revenue year over year, it could potentially be valued that high.
But we've already got an example of a stock that has doubled and tripled its revenue over the past few quarters in Nvidia. During its run since 2023, Nvidia's stock was never valued higher than 51 times forward earnings and 46 times sales.
NVDA PS Ratio data by YCharts
However, it posted multiple quarters in a row of revenue tripling, while Palantir's latest quarter saw revenue rise 36%. While Palantir's growth is accelerating, it's not growing quickly enough to justify its massive price tag.
As a result, I think investors should follow Karp's lead and either trim their position significantly to realize gains or sell out of the stock entirely. Palantir stock is down 30% from its recent highs and it's going to be near-impossible for Palantir to live up to the expectations that are priced into the stock. Investors should take their massive gains and realize them.
