Putting aside the short-lived periods of hype associated with precious metals and cryptocurrencies, no trend has more consistently captured the attention and capital of investors over the last three years than artificial intelligence (AI).
AI looks to be the biggest technological advancement since the advent and proliferation of the internet in the mid-1990s. Empowering software and systems with the solutions to make autonomous decisions can boost the efficiency and/or growth rate for countless industries around the world. In other words, there's a reason shares of Nvidia (NVDA 1.53%) and Palantir Technologies (PLTR +1.25%) have soared since the beginning of 2023.
But while the faces of the artificial intelligence revolution have laid a solid foundation and dazzled with their jaw-dropping sales growth, they've also presented investors with a $12.8 billion ominous warning. It begs the question: Are investors paying attention to this potential red flag from two of Wall Street's most influential AI stocks?
Image source: Getty Images.
Sustainable moats have powered Nvidia and Palantir to new heights
Although AI has been a tailwind for a long list of companies in and beyond the tech sector, the core trait responsible for adding nearly $4.3 trillion in market cap to Nvidia and propelling Palantir's shares higher by almost 2,200% since the end of 2022 is their respective sustainable moats.
Nvidia's graphics processing units (GPUs) account for the overwhelming majority of GPUs currently deployed in AI-accelerated data centers. These chips are the brains that support split-second decision-making and the training of large language models.
While first-mover advantage has certainly helped Nvidia claim a monopoly like share of GPUs deployed in AI-accelerated data centers, it's the company's superior hardware that's primarily driven these sustained gains. None of its external competitors is particularly close to challenging the compute capabilities of Hopper, Blackwell, and Blackwell Ultra.
To make things even more difficult for its external competitors, Nvidia CEO Jensen Huang has his company targeting the debut of an advanced GPU each year. The Vera Rubin GPU, which runs on an all-new processor, is set to make its debut in the latter half of this year. It's unlikely that Nvidia's AI hardware will face serious challenges to its compute capabilities anytime soon.
NASDAQ: NVDA
Key Data Points
Whereas Nvidia has a well-defined sustainable moat on the hardware front, the unique aspect of Palantir's operating model stems from its application of AI and machine learning across its software-as-a-service (SaaS) platforms, Gotham and Foundry. Neither SaaS platform has a large-scale competitor.
Palantir's bread-and-butter is Gotham. This segment is used by the U.S. federal government and its allies to plan and oversee military missions, as well as to gather and analyze data to track potential threats. Gotham's contracts with the U.S. federal government typically span multiple years, leading to predictable sales growth and operating cash flow.
Foundry is a newer segment for Palantir, but nonetheless one that can generate sustained double-digit growth for a long time to come. Put simply, Foundry helps businesses streamline their operations by making sense of their data.
Although sustainable moats have supported stellar returns for both companies, the people who know Nvidia and Palantir best have sent a different message to Wall Street.
Image source: Getty Images.
This $12.8 billion warning to Wall Street shouldn't be ignored
While Nvidia's and Palantir's insiders have been its biggest cheerleaders, Form 4 filings with the Securities and Exchange Commission (SEC) tell another story.
An "insider" is a high-ranking executive, board member, or beneficial owner of 10% (or more) of a company's outstanding shares who may possess non-public information. For the sake of transparency and to satisfy legal requirements, insiders are required to file Form 4 with the SEC within two business days of buying or selling their company's shares.
Over the last five years, Nvidia's and Palantir's insiders have been aggressive sellers of their respective shares. Based on aggregated Form 4 filings, net-selling activity totals:
- Nvidia: $5.66 billion
- Palantir Technologies: $7.17 billion
Collectively, insiders at the faces of the AI revolution have disposed of $12.83 billion more in stock than they've purchased since late January 2021.
However, not all selling activity is necessarily nefarious. Most executives and board members are paid in common stock and/or options. To cover their federal and/or state tax liability, these individuals often sell a portion of their share-based compensation. Tax-based selling by insiders isn't something that should cause investors to lose confidence in a stock.
NASDAQ: PLTR
Key Data Points
But insider trading activity is a door that swings both ways. Whereas selling activity has been seemingly endless for Nvidia and Palantir over the trailing five years, insider buying activity has been virtually nonexistent.
The last time an executive or board member purchased shares of Nvidia on the open market was early December... of 2020! Meanwhile, Palantir has had a couple of purchases by a beneficial owner at a very low share price thanks to a pre-existing commercial agreement. Altogether, just $7.8 million has been spent on insider buys for Palantir stock since late January 2021.
There's only one reason insiders buy shares of their company -- they expect them to head higher. A lack of insider buying, coupled with persistent insider selling activity, sends a stark message to Wall Street and investors that the shares of Nvidia and Palantir aren't attractively priced.
The time-tested price-to-sales (P/S) ratio would seem to agree. Historically, a P/S ratio above 30 for industry leaders at the forefront of a game-changing trend has indicated the presence of a bubble. Nvidia's P/S ratio topped 30 in early November, while Palantir ended the previous week at a P/S ratio of nearly 100.
The writing appears to be on the wall from insiders that Nvidia's and Palantir's parabolic ascents aren't sustainable.
