Despite some recent volatility in equities, Wall Street's major stock indexes -- the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite -- have been virtually unstoppable since bottoming out in October 2022.
The bull market rally that's led all three indexes to numerous record-closing highs has been fueled by a confluence of factors. This includes excitement surrounding Donald Trump's return to the White House (stocks soared during Trump's first term), stock-split euphoria, and better-than-expected corporate earnings. But at the tippy-top of the list of stock market catalysts is the emergence of artificial intelligence (AI).
AI empowers software and systems with the ability to reason, act, and evolve, without the need for human intervention. This capacity to become more proficient at assigned tasks, as well as evolve to learn new skills over time, gives this technology jaw-dropping reach and an almost unfathomable addressable market.
Image source: Getty Images.
Although dozens of stocks have benefited from the rise of AI, no two companies have been more direct beneficiaries than semiconductor colossus Nvidia(NASDAQ: NVDA) and data-mining specialist Palantir Technologies(NASDAQ: PLTR). At their respective peaks, Nvidia tacked on well over $3 trillion in market cap in under two years, while Palantir's stock jumped more than 1,500% on a trailing-two-year basis.
While the operating results for both companies suggest plenty of promise, insider activity for Nvidia and Palantir speaks volumes.
Insiders at Nvidia and Palantir offer a potentially deafening warning to investors
Thanks to the internet, the stock market is freer and fairer than it's ever been. Whether you're a Wall Street professional or an everyday investor putting your first $500 to work in the stock market, you have the ability to access income statements, balance sheets, and investor presentations at the click of a button.
Something else that's readily available to investors, and can, on occasion, tell quite the story is insider trading activity. By "insiders," I'm primarily referring to high-ranking executives and a company's board of directors -- i.e., the people who would intimately know how well or poorly a company is performing -- but it also includes beneficial owners with a 10% (or greater) stake in a company.
Insiders of a publicly traded company are required to file Form 4 with the Securities and Exchange Commission no later than two business days after a transaction. In other words, if someone on a management team or board acquires or disposes of their company's stock, investors are going to know about it relatively quickly.
The insiders at Nvidia and Palantir Technologies have been creating a deafening roar with their trading activity -- and it's time investors paid closer attention.
Over the trailing-five-year period, as of the end of February 2025, insiders sold more than $3.8 billion worth of Nvidia stock, and are closing in on $6.9 billion in cumulative sales of Palantir stock since its September 2020 initial public offering.
What's even more eye-popping is that there hasn't been a single director or executive who's purchased shares of Palantir since it went public. Meanwhile, the last open-market purchase from an Nvidia insider came from Chief Financial Officer Colette Kress in December 2020.
To be fair, insider selling isn't automatically a bad thing. Executive pay can sometimes be heavily weighted to stock-based compensation. In instances like this, insiders exercise options and/or sell common stock to raise the capital needed to pay their federal/state tax bill.
But while there are a multitude of reasons to sell shares of a public company, there's only one viable reason to buy stock: an investor believes the price will head higher. A complete lack of insider buying from Palantir's management team and board of directors, along with a greater-than-four-year absence of open-market purchases from Nvidia's insiders, speaks volumes for both AI leaders.
Image source: Getty Images.
Why are Nvidia's and Palantir's insiders refusing to make open-market purchases?
If there's a silver lining for shareholders invested in these companies, it's that there's clear evidence of stock options driving at least some of this selling activity. Options need to be exercised prior to their expiration, and selling shares is an easy way for insiders to raise the capital necessary to foot their tax bill. This type of selling is benign and shouldn't concern Wall Street or everyday investors.
Perhaps the more pressing question to address is why aren't insiders making open-market purchases?
One possibility is that history doesn't favor next-big-thing innovations during the early innings of their expansion. While orders for Nvidia's Hopper (H100) and Blackwell graphics processing units (GPUs) have been exceptionally strong, and Palantir's AI-driven Gotham platform has consistently won multiyear contracts from the U.S. government, no game-changing innovation has avoided a bubble-bursting event for three decades.
Put another way, investors commonly overestimate the initial adoption rate and mainstream utility of potentially game-changing technologies and innovations. Regardless of how impressive the revenue ramp has been for Nvidia and Palantir to this point, all innovations, including AI, need ample time to mature.
When lofty expectations for next-big-thing trends aren't met, the companies that led the charge tend to be hit the hardest. If the AI bubble bursts, as history suggests will happen, Nvidia and Palantir could see their respective share prices head notably lower.
The other prevailing issue for Nvidia and Palantir is their respective valuations.
Though the traditional price-to-earnings (P/E) ratio is the quick-and-easy tool relied on by most investors to judge value, it doesn't work particularly well for high-growth companies like Nvidia and Palantir. Instead, the price-to-sales (P/S) ratio demonstrates just how far outside of historic norms Nvidia's and Palantir's relative valuations have been.
Last summer, Nvidia's trailing-12-month P/S ratio briefly tipped the scales at north of 42. As for Palantir, it's recent run-up to $125 per share put its P/S ratio on the doorstep of 100! Throughout history, public companies on the leading edge of a next-big-thing trend have commonly peaked with a P/S ratio in the neighborhood of 30 to 40. In short, neither company appears to offer a sustainable valuation premium.
Insiders at Nvidia and Palantir Technologies are sounding a warning, but are any investors willing to listen?
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.
