CEO Alex Karp Just Sold More Than $60 Million in Palantir Stock. Should Investors Follow Suit?

Key Points

• Reports emerged that Palantir's chief executive sold a sizeable tranche of company stock last week.

• However, the devil is in the details, and the reason behind the sales was easy to understand.

• It's best to put the sale in the context of an executive's remaining holdings before jumping to any conclusions.

• 10 stocks we like better than Palantir Technologies ›

The past couple of years have been a whirlwind for Palantir (NASDAQ: PLTR) investors. The company had been working on advanced algorithms in relative obscurity for nearly 20 years before the dawn of artificial intelligence (AI) in late 2022. Under the leadership of CEO Alex Karp, Palantir used its decades of experience in the field to develop the company's Artificial Intelligence Platform (AIP). The AIP uses generative AI to collect data from a variety of disparate software systems and aggregates the information under a single dashboard, helping business leaders make data-driven decisions in real time.

Demand has been off the charts, helping propel Palantir stock to new heights. Since early 2023, Palatir's stock has gone parabolic, soaring an eye-popping 2,350% as of this writing. That meteoric rise has caused a commensurate increase in the stock's valuation, causing some retail investors and Wall Street veterans alike to avoid the stock.

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If that weren't enough, Karp just sold millions of Palantir shares, making some shareholders justifiably nervous. If the chief executive is selling shares, is it time for investors to follow suit?

Let's see what the evidence suggests.

Image source: Getty Images.

What's driving the stock higher

Before we dig into the numbers, it's worth looking at what's driving the stock price into the stratosphere -- and the most recent quarter is a good place to start.

In the second quarter, Palantir delivered revenue that jumped 48% year-over-year to $1 billion -- the first time the company has surpassed this threshold. This resulted in adjusted earnings per share (EPS) of $0.16, which soared 78%. This marked the eighth consecutive quarter of accelerating revenue growth.

The biggest contributor was the company's U.S. commercial segment (including AIP), which generated revenue of $306 million, an increase of 93% year over year and 20% quarter over quarter.

With results of that magnitude and the enormous potential represented by the ongoing AI adoption, its easy to see why the stock has been firmly in rally mode.

By the numbers

In a regulatory filing with the Securities and Exchange Commission (SEC), Palantir provided details regarding the stock sale. Karp sold a total of 409,072 shares, in a range of $142.46 to $157.56. In all, the total amount of the sale was more than $60 million. A sale of that magnitude might make investors a bit wary, particularly because it was the CEO making the sale. It might be easy to conclude that the chief executive knows something we don't, but that simply isn't the case. Digging a little deeper into the filing helps to provide some important context.

As part of Karp's compensation package, he receives restricted stock awards (RSAs) of Class B stock that vest over a period of years. Class B stock has 10 times the voting power of Class A stock and is restricted to founders and certain insiders and is a way to reward long-term performance and to align Karp's interests with those of Palantir shareholders.

On August 20, Karp was awarded the rights to 975,000 shares of Class B stock -- and the taxman was waiting with his hand out. Since Class B shares can't be sold on the open market (it's restricted), he immediately converted 222,878 shares to Class A shares, which were then sold on the open market to pay the required withholding tax obligations.

It's also important to note that following the $60 million sale, Karp still owned more than 6.43 million shares of Palantir stock, which were collectively worth more than $1 billion (at the time of this writing).

The old adage

Given Karp's sizable sale of Palantir stock, should investors follow suit? There's an old saying on Wall Street that there are lots of reasons to sell a stock but only one reason to buy. In this case, the reason for selling was to settle up with Uncle Sam and pay the required withholding tax on his just-awarded stock compensation.

However, given that Karp still holds personal Palantir shares worth roughly $1 billion, I don't view the sale as anything more than a financial management decision.

In a more general sense, the answer to that question of whether or not to sell will vary from investor to investor, and there's no single answer that fits all situations.

Some investors would argue that Palantir's valuation is stretched, which is a reasonable concern. The stock is currently selling for 184 times next year's earnings, making it among the most expensive stocks on the market.

Furthermore, given the stock's meteoric rise, Palantir may represent an overly large portion of an investor's individual portfolio. For example, $10,000 invested on Jan. 2, 2023, would be worth more than $244,740 (as of this writing) and may dwarf an investor's other holdings.

As a general rule, I would never sell a stock simply because a member of the management team is selling -- particularly if the reason is in black and white.

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Danny Vena has positions in Palantir Technologies. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.