Billionaire Peter Thiel just sold $1 billion worth of Palantir stock. Should you withdraw your money too?

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

Thiel sold more than $1 billion worth of Palantir stock during the last few days of September and the first of October, according to Securities and Exchange Commission (SEC) filings. This sale took place after the company officially joined S&P500 September 23. Thiel also dumped about $400 million worth of Palantir stock earlier this year.

Thiel’s sale was automatic under the 10b5-1 plan adopted in May. This plan automatically sells Thiel shares when certain criteria are met, effectively limiting the influence of insider information on the selling decision. Thiel has already exhausted the permit valid until December 31 next year.

Thiel remains one of Palantir’s largest shareholders, which has a market capitalization of about $83 billion as of this writing. He and his co-founders also hold voting shares, thanks to which the three of them retain control of the company. However, it may be time for investors to consider whether they should also sell Palantir stock.

A big name in big data

Palantir began by offering Big Data analytics to government agencies. The only early outside investor (besides Thiel’s own venture capital firm) was the CIA’s venture capital arm. Executives have eventually adapted their software to the needs of large enterprises, but until recently it has largely focused on large, high-value organizations.

Commercial customers are growing rapidly. In his latest letter to shareholders, co-founder and CEO Alex Karp points out that the number of commercial customers has grown from 14 to 295 over the past four years, led by the launch of Palantir’s Artificial Intelligence Platform (AIP). AIP makes it easier for customers to explore and use data using natural language and automates workflows. It can also help you create applications that leverage enterprise data sets.

As it scales, Palantir is showing tremendous operating leverage. Adjusted operating margin increased from 23% in the second quarter of 2022 to 37% in the most recent quarter. The company also demonstrated profitability on a generally accepted accounting principles (GAAP) basis for seven consecutive quarters, earning it a spot on the S&P 500 Index.

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

Thiel’s sales suggest something about the stock

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

The company’s stock is currently trading at around 87 times analyst consensus estimates for 2025 earnings. And while the company is showing strong earnings growth as it leverages fixed costs against more commercial customers, this valuation makes it extremely risky to own.

First, a high valuation will compound any lost profits. Slower-than-expected growth will dramatically lower the share price because it relies on such a high earnings multiple. Meanwhile, it’s likely that earnings growth won’t drive up share prices as much as it has for other expensive AI companies.

However, even if Palantir continues to grow its earnings at an average rate of 20% and expand its operating margin by the end of the decade, it will still be difficult to justify its current price. Morningstar analyst Malik Ahmed Khan projects revenue growth of 26% and GAAP operating margin rising to the low 30s over the next five years from the current 16%. The fair value he places on the stock under these circumstances is just $26 per share, or less than 30% of the current price.

While the underlying business is great, Palantir stock is very expensive. Patient long-term investors can gain an advantage in stocks in the long run, but there are probably better investment opportunities at this point. Perhaps this is a good time to sell and invest the funds in another growth stock.

Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Levy holds positions at Meta Platforms. The Motley Fool has positions in and recommends Meta Platforms, Palantir Technologies, and PayPal. The Motley Fool recommends the following options: December 2024 short calls for $70 on PayPal. The Motley Fool has a disclosure policy.