Palantir Stock: Blown Out Of Proportion (NYSE:PLTR)

It seems like the bears are once again berating Palantir (NYSE:PLTR) in various investing forums. Its key company executives sold off 2.5 million Class A shares in Q4 2022 and 5.7 million Class A shares throughout the course of 2022, which is fueling angst amongst bag holders. While many investors are questioning if Palantir’s top brass is trying to bail before the ship sinks, others believe they’re trying to get rich at the shareholders’ expense. But the ground reality isn’t all that grim. In this article, I’ll break down the latest insider sales data and attempt to explain why this issue is being blown out of proportion. Let’s take a closer look to gain a better understanding of it all.

Insider Selling Issue

Let me start by saying that the SEC mandates company insiders – which could be key officers, directors and employees – to disclose their trading activity via Form 4 filings. These insiders typically have real-time updates about their company’s ongoing quarters, well before the results are released in the public domain. So, the general belief is that these insiders are front-running the market at all times, and tracking their trading activity provides us leading insights about a company’s upcoming results. But like all trading strategies, this one also provides false signals that can mislead investors.

Per our database at Business Quant, Palantir’s insiders sold roughly 2.5 million Class A shares worth approximately $17.8 million in Q4. In the entire past year, Palantir’s key personnel sold 5.7 million Class A shares worth about $48.2 million. The numbers look even more sensational once we further expand the timeline – Palantir’s insiders sold 130.8 million Class A shares, which is nearly $2.3 billion in value, since its direct listing in late 2020. This last figure equates to a gigantic 15.7% of the company’s entire market capitalization at the time of this writing, and it’s understandable why many investors are worried about rampant insider sales.

What exacerbates the problem is that Palantir’s CEO, Alexander Karp, has himself led the selloff. He contributed nearly 46% of the total value of insider sales since the company’s direct listing, and investors are understandably frantic about it. Many investors now argue that Palantir’s top leadership, perhaps, doesn’t have any faith in the company’s future and that’s why they’re selling in hoards. Our very own “On The Pulse” from Seeking Alpha encouraged investors 2 weeks ago that investors should be wary of paying a premium for Palantir’s shares, especially since Karp has been a net seller.

While I understand the optics are bad on this one, the ground reality is that we’re looking at this data with a myopic view. The insider selling isn’t nearly half as bad as it’s being made out to be.

The Reality Check

Let’s look at the chart below to put things in perspective. Note how insider sales have plummeted in recent quarters. Yes, the figure is slightly up sequentially in Q4 2022, but it’s down 93% year over year, and it’s down 95% from the comparable quarter 2 years ago. This latest figure is downright paltry in my opinion, with the value of insider sales amounting to just 0.12% of the entire market capitalization during Q4. And yet, there’s so much talk of insiders jumping ship before it sinks.

As far as the sequential increase of insider selling in Q4 is concerned, I contend that most of it happened due to tax purposes. When an insider exercises their stock options or awards, they’re presented with a tax liability. While some company executives meet their tax liability through their savings, other insiders who are paid mostly in stock options, are relegated to selling their holdings to pay the tax man and there’s nothing nefarious about it.

Besides, I’d like to point out that Palantir’s key insiders still hold a significant amount of Class A shares, in spite of their recent share sales. For the record, this is in addition to the other classes of shares that they might hold. Alexander Karp, for instance, still holds 6.43 million Class A shares and 48.25 million Class B shares.

The point that I’m trying to make here is that these insiders still have sizable skin in the game, that many investors are worried about. If these insiders wanted to bail ship, they would have sold more of their holdings in the currently uncertain macroeconomic environment. But they’re choosing to maintain their holdings in Palantir instead, perhaps because they see a brighter future for the company with a much higher stock price.

Food for Thought

The takeaway from this article is that insider selling may have been a big issue for Palantir’s shareholders till a few quarters ago, but it certainly isn’t anymore. The value of insider sales last quarter amounts to just 0.1% of the company’s current market capitalization, which indicates that selling pressure has quickly waned off in the last year or so. So, readers and investors may want to ignore the noise surrounding Palantir’s insider sales.

Having said that, Palantir’s shares are trading at nearly 8-times its trailing twelve-month sales. This may seem huge in isolation, but it’s actually quite attractive when we factor in Palantir’s above-average pace of revenue growth. Many of the other prominent software stocks are trading at similar Price-to-Sales multiples, even though their pace of revenue growth severely lacks behind Palantir’s. This makes Palantir attractively valued at current levels, in my opinion.

Besides, its management made an interesting statement yesterday. Apparently, while most software companies across the globe are laying off employees in a bid to cut costs, Palantir is looking to expand their team this year. This suggests that Palantir’s core business is not succumbing to recessionary pressures and there’s ample headway for growth even during these uncertain macroeconomic conditions. So, overall, I reiterate my bullish stance on Palantir. Readers and investors may want to accumulate its shares on potential price corrections.

(Read – Palantir: This Is Ridiculous)

Good Luck!