No trend has been more impactful on Wall Street over the last three years than the rise of artificial intelligence (AI). Empowering software and systems with the tools to make split-second decisions without human oversight, as well as to potentially learn over time and become more efficient at their assigned tasks (or new tasks), makes the addressable market for AI sky-high.

Over the trailing-three-year period, as of Sept. 16, leading AI applications companies have soared. Shares of Palantir Technologies (PLTR 3.08%) have rallied north of 2,000%, while Meta Platforms (META -0.26%) bounced back strongly from the 2022 bear market to gain 416%.

While both companies have been ideal examples of how AI can enhance existing operations and boost sales, they’ve also presented Wall Street with an undeniable warning that investors would be wise not to ignore.

Image source: Getty Images.

Palantir’s and Meta’s breakneck rallies didn’t occur by accident

Before digging into the details of this ominous warning for the stock market, it’s imperative to understand how Palantir and Meta Platforms embraced artificial intelligence. You’ll get a better understanding for why their respective shares have skyrocketed by more than 2,000% and 400%.

Palantir’s rally has been powered by the success of its two AI- and machine learning-driven platforms, Gotham and Foundry. Gotham is the real superstar here, with this software-as-a-service platform used by federal governments to collect and analyze data, as well as plan and oversee military missions. Meanwhile, Foundry is a service used by businesses to better understand their data in order to improve their operating efficiency.

The beauty of Gotham and Foundry for Palantir is that they’re irreplaceable. No one-for-one service exists at scale that can offer what Palantir delivers for federal governments and businesses. This means little worry about having its customers poached by other companies.

Additionally, Palantir’s operating cash flow tends to be exceptionally safe and somewhat predictable thanks to its operating model. Gotham locks in multiyear contracts (typically four or five years) with the U.S. government, and its Foundry platform is a subscription-based service that lends to a high retention rate.

As for social media titan Meta Platforms, it’s taken an already proven operating model and made it that much better with the incorporation of AI solutions.

Meta is the parent of some of the most-visited social sites on the planet, including Facebook (the most-visited site), Instagram, WhatsApp, Threads, and Facebook Messenger. During the month of June, Facebook averaged 3.48 billion people visiting its family of apps daily. Since no other social media provider can offer this broad of an audience to advertisers, Meta typically possesses exceptional ad-pricing power.

But with AI, Meta has taken its ad-driven business one step further. It’s given businesses access to generative AI solutions on its advertising platform, which can tailor static and video messages to users in order to improve click-through rates. This has the potential to accelerate ad growth and beef up Meta’s pricing power.

Meta CEO Mark Zuckerberg also has other projects in the works that rely heavily on the influence of AI. For instance, Meta is angling to be one of the key onramps to the metaverse — the 3D virtual world where users can interact with each other and their surroundings.

Image source: Getty Images.

This is a warning that investors would be wise not to ignore

In spite of these well-defined competitive advantages, the people who know Palantir and Meta best have been sending an unmistakable warning to Wall Street for quite some time.

The worry for these stocks has to do with their respective insider trading activity. An insider is typically a high-ranking executive, someone on the board of directors, or a beneficial owner who holds at least 10% of a company’s outstanding shares. In other words, these are folks who potentially possess non-public information and know their company better than any analyst on Wall Street.

Any purchases and sales made by insiders are required to be filed with U.S. regulators within two business days following the transaction date. This is done for the sake of transparency, as well as to allow investors to potentially track the sentiment of insiders toward their company and its prospects.

When it comes to Palantir Technologies and Meta Platforms, there seems to be only one thing continually on the mind of its insiders: sell, sell, sell!

Over the trailing-five-year period (or in the case of Palantir, 14 days shy of five years since it made its public debut on Sept. 30, 2020), net-selling activity has been eye-popping for both companies:

Collectively, more than $17.2 billion in net stock sales have been made by insiders at both companies.

Now here’s the caveat to this data: not all insider selling is necessarily nefarious. Most executives at America’s largest companies receive the lion’s share of their compensation in the form of stock and options. To cover their federal and/or state tax liability, executives and directors may need to sell stock (or exercise options and subsequently sell stock) to pay their bill. This type of selling activity isn’t worrisome.

However, the other swing of the pendulum appears to validate this $17.2 billion warning as something investors shouldn’t brush off as benign selling activity.

Though there are a number of reasons to sell stock, the lone reason to buy shares is if you believe they’ll head higher. Insider buying is as cut-and-dried as it gets. Over the last five years, not one executive or director has spent a penny purchasing Meta Platforms’ stock. As for Palantir, it has one purchase from an executive or board member in its nearly five years as a public company: a $1.16 million acquisition by former Chief Accounting Officer Heather Planishek.

With the stock market pushing to its third-priciest valuation when back-tested 154 years, investors are looking for clear signs that Wall Street’s leading businesses still offer upside. Palantir and Meta, which have just one insider purchase between them since mid-September 2020, are sending all the wrong signals.

If insiders at Wall Street’s most-influential businesses won’t purchase their own company’s stock, why should investors?