Palantir Technologies(NASDAQ:PLTR) has been one of the hottest stocks on the market this year. However, Arista Networks(NYSE:ANET)a company that conducted a 4 to 1 study stock split on December 4, was the best performing in the last four years. Palantir shares have surged 190% during that time, while Arista shares have soared 525%.
The following billionaire-led hedge funds sold Palantir stock and bought Arista stock in the third quarter:
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Cliff Asness' AQR Capital Management sold 99,140 shares of Palantir, reducing its stake by 16%. The hedge fund added 248,090 Arista shares, increasing its position by 46%.
Israel Englander's Millennium Management sold 4.4 million shares of Palantir, reducing its stake by 90%. The hedge fund also purchased 23,292 shares of Arista, increasing its position by 5%.
David Shaw's DE Shaw Investment Management sold 1.7 million shares of Palantir, reducing its stake by 35%. The hedge fund also added 28,765 Arista shares, increasing its position by 612%.
The trades made by Millennium Management and DE Shaw are particularly noteworthy because they are tied for the second best-performing hedge funds of all time in terms of net gains since inception, according to LCH Investments. But the transactions listed above were made in the third quarter, which ended two months ago.
Here's what investors need to know about Palantir and Arista today.
Palantir specializes in data analytics. It began creating software for the U.S. intelligence community more than two decades ago and has since expanded into the commercial sector.
Its core products, Gotham and Foundry, enable customers to transform complex information into actionable insights. For example, semiconductor manufacturers can use Palantir's software to manage supply chains and improve production yields.
Last year, the company expanded its portfolio with the launch of AIP, an artificial intelligence (AI) platform that integrates large language models into Gotham and Foundry. This enables customers to apply generative AI to their operations. For example, a semiconductor manufacturer using Foundry for supply chain management could prompt the natural language platform to suggest solutions when problems arise.
AIP has received praise from several industry experts and has boosted Palantir's business. Forrester Search Analysts, led by Mike Gualtieri, recently ranked AIP as the best AI platform on the market. And Palantir has reported accelerating sales growth over the past five quarters, driven by what CEO Alex Karp describes as “unwavering demand” for AIP.
Unfortunately, Palantir has a valuation problem. Wall Street expects adjusted earnings to grow 24% annually through 2026.
This consensus estimate might be a bit low, given that spending on AI platforms will grow 40% annually through 2028, according to IDC. Even so, Palantir currently trades at 200 times adjusted earnings, an absurd valuation even though earnings are expected to grow 50% annually over the next few years.
Investors who sue Palantir here could find themselves in trouble. The valuation will fall at some point, and that can only happen in one of two ways: either earnings grow much faster than expected, or the stock ends up experiencing a correction. The most prudent choice for potential investors is to avoid the stock at this time, and current shareholders should consider reducing their large positions.
Arista specializes in networking solutions for enterprise and cloud data centers. The company complements its hardware (switches and routers) with adjacent software for network automation, monitoring and security. Arista is the leader in the high-speed verticals of the Ethernet switching market (i.e. 100+ Gigabit), with more than twice the market share of its closest competitor, Cisco Systems.
Arista says two key innovations allowed it to disrupt the market. First, it provides a single version of its Extensible Operating System (EOS) that runs on all of its hardware, simplifying network management. Second, it relies entirely on merchant silicon (chips built by third parties), rather than designing its own chips. This allows Arista to focus its research and development (R&D) spending on software development and provides customers with flexibility in chip selection.
Arista checked all the right boxes with its third-quarter financial report. The company beat expectations, raised its full-year guidance and provided an optimistic outlook for 2025.
Specifically, revenue increased 20% to $1.8 billion and non-GAAP net income increased 31% to $0.60 per diluted share. Management now expects revenue to increase 22% in the fourth quarter and the company forecasts 16% growth in 2025.
In the future, data centers will need to modernize their network infrastructure to keep up with advances in artificial intelligence. Arista is ideally positioned to benefit from this trend, given its leadership in the 100+ Gigabit vertical market. But Wall Street expects the company's adjusted earnings to grow 14% annually through 2026, making the current valuation of 49 times adjusted earnings look expensive.
Arista is a great company with attractive growth prospects, but the current price is a problem. I think it's best to relegate this stock to a watch list for now – and I say that as a current shareholder. I would feel more comfortable adding to my position in the event of a 20% pullback.
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Trevor Jennevine holds positions in Arista Networks and Palantir Technologies. The Motley Fool ranks and recommends Arista Networks, Cisco Systems and Palantir Technologies. The Mad Motley has a disclosure policy.
