Billionaire Peter Thiel just sold $1 billion of Palantir stock. Should you cash in too?

Peter Thiel is best known as one of the co-founders PayPal and an early investor in Meta platformsthen known as Facebook. After leaving PayPal, he co-founded another company, Palantir Technologies (PLTR 4.67%)where he is president.

Thiel sold more than $1 billion worth of Palantir stock in the last days of September and the first day of October, according to Securities and Exchange Commission (SEC) filings. These sales came after the company officially joined S&P 500 on September 23. Thiel also divested about $400 million worth of Palantir stock earlier this year.

Thiel’s sales were executed automatically as part of the 10b5-1 plan adopted in May. This plan automatically sells Thiel stock when certain criteria are met, effectively reducing insider influence on the sale decision. Thiel has now exhausted the authorization until December 31 of next year.

Thiel remains one of the largest shareholders in Palantir, which has a market cap of about $83 billion as of this writing. He also holds supervoting shares with his co-founders, ensuring the three retain control of the company. But it might be time for investors to consider whether they should also sell Palantir stock.

Image source: Getty Images.

A big name in big data

Palantir started by providing big data analytics to government agencies. The venture capital arm of the CIA was the only early outside investor (besides Thiel’s venture capital firm). Management eventually adapted its software for large enterprises, but remained largely focused on large, high-value organizations until recently.

Commercial customers are growing rapidly. Co-founder and CEO Alex Karp points out that commercial customers have grown from 14 to 295 over the past four years in the latest letter to shareholders. This growth is supported by the launch of Palantir’s Artificial Intelligence Platform (AIP). AIP makes it easy to explore and use natural language customer data and automate workflows. It can also help develop applications using enterprise datasets.

As it scales, Palantir has tremendous operational impact. Adjusted operating margin rose from 23% in the second quarter of 2022 to 37% last quarter. It has also been profitable on a generally accepted accounting principles (GAAP) basis for seven consecutive quarters, earning it a spot in the S&P 500.

The outlook for business also remains strong. As mentioned, it only has 295 commercial customers. There are many more large organizations with big data needs that could adopt Palantir software as they move away from in-house solutions. Management expects 2024 revenue of approximately $2.75 billion and adjusted operating income of approximately $970 million. These represent an increase of 24% and 53%, respectively. And Palantir should be able to sustain this strong revenue growth for years to come as it expands its commercial business and government contracts ensure stable sales.

Thiel’s sales suggest something about the stock

Despite strong growth at Palantir and excellent management execution, it’s hard to justify Palantir’s current share price.

The stock is currently trading at about 87 times analyst consensus 2025 earnings estimates. And while the company is showing strong earnings growth as it leverages its fixed costs with more commercial customers, that valuation makes it extremely risky to own.

First, the high valuation will magnify any loss of earnings. Slower-than-expected growth will cut the stock price sharply because it is based on such a high earnings multiple. Meanwhile, the earnings beat likely won’t boost the stock as much as it has in other high-priced AI stocks.

But even if Palantir continues to grow its top line at 20% through the end of the decade and expand its operating margin, it’s still difficult to justify the current price. Morningstar analyst Malik Ahmed Khan’s bull case models 26% revenue growth and GAAP operating margin expanding to 30% over the next five years, from 16% currently. The fair value he places on the stock under these circumstances is just $26 per share, less than 30% of the current price.

While the underlying business is great, Palantir stock is very expensive. Patient long-term investors can get ahead of stocks in the long run, but there are probably better investment opportunities right now. It may be a good time to sell and put the money to work in another growth stock.