Nvidia, Palantir, and AMD Have a Nearly $13 Billion Warning for Wall Street -- but Are You Paying Attention?

Key Points

• Competitive advantages, along with insatiable demand for artificial intelligence (AI) hardware and software, have sent shares of Nvidia, Palantir Technologies, and Advanced Micro Devices soaring.

• On a combined basis, insiders at Nvidia, Palantir, and AMD have made just four purchases of their respective company's stock spanning five years.

• Historical precedent poses a big problem for some of Wall Street's hottest AI stocks.

• 10 stocks we like better than Nvidia ›

Roughly 30 years ago, the advent and proliferation of the internet began positively altering the growth arc for corporate America. The internet offered businesses new ways to interact with prospective and existing clients, as well as market their products. For decades, investors have been waiting for the next technological leap forward, and the artificial intelligence (AI) revolution looks to be it.

The combination of increased productivity and consumption-side effects associated with the rise of AI is expected to increase global gross domestic product by $15.7 trillion come 2030, according to analysts at PwC. This sky-high addressable market is the primary reason we've witnessed Wall Street's AI darlings -- Nvidia (NASDAQ: NVDA), Palantir Technologies (NASDAQ: PLTR), and Advanced Micro Devices (NASDAQ: AMD), which is commonly known as "AMD" -- soar since 2023 began.

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Image source: Getty Images.

Nvidia's Hopper (H100) and Blackwell graphics processing units (GPUs) account for the bulk of the GPUs deployed in AI-accelerated data centers. Meanwhile, production for AMD's Instinct series AI-accelerating chips is expanding, with the expectation that it'll carve out a healthy share of the AI-GPU market for enterprise data centers.

As for Palantir, its AI- and machine learning-powered software-as-a-service Gotham and Foundry platforms offer sustainable moats. Federal governments turn to Gotham for military mission planning and execution, along with data collection and analysis. Meanwhile, Foundry is a subscription-driven platform for businesses looking to make sense of their big data and streamline/automate their operations.

While their respective share price appreciation indicates everything is going great for Nvidia, Palantir, and AMD, all three companies have, collectively, offered up a nearly $13 billion warning to Wall Street. The real question is: Are you, or any other investors, heeding this warning?

Nvidia, Palantir, and AMD combine for close to a $13 billion warning

There are a number of potential headwinds that can come into play for AI stocks over the coming quarters and years, some of which I'll touch on a bit later. However, one of the more front-and-center concerns has to do with the how corporate insiders have approached their company's stock.

Here's the good news: Thanks to required Form 4 filings with the Securities and Exchange Commission, investors have the ability to track the purchasing and selling activity of executives and board members. This activity details the buying and selling of common stock, as well as options activity.

When it comes to Nvidia, Palantir, and AMD, there's been a very clear trend over the last five years (note: Palantir's initial public offering was Sept. 30, 2020): insider selling.

Over the trailing-five-year period, net selling activity has totaled:

• More than $4.71 billion for Nvidia.
• Over $7.43 billion for Palantir.
• Approximately $762 million for AMD.

Collectively, the insiders of these three highly influential AI businesses have sold north of $12.9 billion worth of their common stock over the trailing half-decade.

However, insider selling isn't as cut-and-dried as it might appear on the surface. This is to say there are a lot of reasons insiders might sell their company's stock -- and they're not all nefarious.

For instance, most executives receive stock-based compensation and/or options. Options are required to be exercised within a certain time frame, otherwise they expire worthless. With some executives receiving the lion's share of their compensation in stock or options, they have to sell their company's stock to cover their federal and/or state tax bill. The key point here is that not all insider selling is necessarily bad.

But at the same time, there's only one reason executives and board members purchase their company's stock: they expect it to head higher. Over the trailing five-year period, executives and board members have made exactly one purchase at Nvidia, one purchase at Palantir, and two purchases at AMD.

The takeaway here is simple: if insiders at Nvidia, Palantir, and AMD aren't willing to purchase their own company's stock, why should everyday investors believe these three stocks still offer significant upside?

Image source: Getty Images.

Insider activity isn't the only concern

Unfortunately, this nearly $13 billion warning isn't the only worry for investors. Historical precedent is a multipronged headwind that has the potential to meaningfully drag down AI stock valuations.

To preface the following discussion, history is never guaranteed to repeat on Wall Street. If there was an indicator that concretely guaranteed short-term directional moves in stocks, you can rest assured that everyone would be using it by now.

Nevertheless, there are historical events and metrics that have flawlessly correlated with directional moves for the S&P 500 and Wall Street's other major indexes in the past. It's these correlations that suggest Nvidia, Palantir, and AMD could be in a world of trouble.

For example, every game-changing innovation since (and including) the advent of the internet in the mid-1990s has endured a bubble-bursting event fairly early in its expansion. This long line of hyped innovations navigating their way through bubbles signals that investors consistently overestimate the utility and early stage adoption of new technologies.

Although spending on AI infrastructure has been robust, as Nvidia's and AMD's operating results suggest, most businesses have yet to optimize their AI solutions or generate a positive return on their AI investments. It's unlikely that artificial intelligence will avoid the fate of previous next-big-thing trends.

The other area where historical precedent comes into play is valuations. Though AMD's valuation isn't egregiously high, the same can't be said for Nvidia or Palantir, which are butting heads with history.

Before the bursting of the dot-com bubble a quarter of a century ago, businesses on the leading edge of the internet revolution consistently peaked at around 30 to 40 times trailing-12-month sales. As of this writing on Aug. 12, Nvidia is tipping the scales at a price-to-sales (P/S) ratio of nearly 31, while Palantir's P/S ratio is 137, which is the highest I've ever witnessed for a megacap company in 27 years of investing.

While both companies offer competitive advantages that are worthy of valuation premiums, history is quite clear that extended premiums of this magnitude aren't sustainable over the long run.

Between persistent insider selling, a virtual lack of insider buying, and mounting historical headwinds, the risk-versus-reward pendulum for Nvidia, Palantir, and AMD has undeniably swung toward "risk."

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Palantir Technologies. The Motley Fool has a disclosure policy.