Palantir Technologies, the AI-enabled security company co-founded by Peter Thiel, seemed to have figured out the passive investing game long before others. But while the stock became the hottest thing in the market last year and boasts a market cap of about $184 billion, it now appears that its passive bonafides could be hurting it.
“Palantir is a very special child in the equity markets because it has played the passive game perfectly… almost as if it had the playbook,” Mike Green, chief strategist at Simplify Asset Management and passive investing critic, said last year as the company was added to two popular stock indices. But Palantir’s shares have fallen sharply recently, which may provide a cautionary tale to investors as other companies eye efforts to push their way into the S&P 500.
Palantir went public via a direct listing in 2020, which Green said gave the company fast track status to join the S&P 500. It finally managed that in September of last year. By December Palantir moved its listing from the NYSE to NASDAQ, facilitating its inclusion in the Nasdaq100 or QQQ, a popular index trade for retail investors.
Even before Palantir was part of the QQQ, which Green estimated could give Palantir an additional $2 billion of inflows, the disclosed ownership of Palantir shares at the end of the third quarter last year among the big three passive investors —Vanguard, Blackrock, and State Street Global Advisors — was 22.23 percent, placing it above Microsoft at 20.5 percent, Apple at 20 percent and Nvidia at 20.17.
The passive game seemed to be working. As of February 13, Palantir had become the best-performing stock in the S&P 500 since the beginning of 2024, gaining more then 300 percent last year — most of it after it joined the S&P 500. But since Feb. 18, the stock has fallen about 38 percent — one of the biggest drawdowns in the market.
The problem, as Green explained, is that while passive investment facilitates momentum investing and pushes stocks up because of regular buying for retirement accounts, it also can create “wild swings” due to the lack of active managers to take the other side of the trade if things start to go south. (Green previously worked for Thiel’s macro hedge fund.)
By the time of Palantir’s descent, the hedge funds who’d helped finance the company as a startup, including Tiger Global and Third Point, were long out of the stock. Others, like Soros Fund Management and Stan Druckenmiller’s Duquesne, had also sold out. As one manager explained, “hedge funds looked at the earnings relative to valuation and questioned it.”
But then Palantir became beloved by supporters of Thiel and Donald Trump. “Palantir went up because people expected Trump to win and for DOGE [Department of Government Efficiency] to cut contracts from legacy Department of Defense contractors and move it all to Palantir,” said one investor.
The U.S. government already accounts for some 60 percent of all of Palantir’s revenues.
In a since deleted post on X, Palantir board member Alex Moore said that the move to Nasdaq, “will force billions in ETF buying and deliver ‘tendies’ [a meme term for gains] to our retail investors.”
He added that “everything we do is to reward and support our retail diamondhands following.”
Well, perhaps not everything. Green has noted that a “passive strategy”— to get into the indices — also allows insiders to sell out at big gains, which is exactly what has happened at Palantir. Last year Thiel sold one third of his shares in the stock runup.
In February, news of Palantir insider stock sales by co-founder and CEO Alex Karp, along with Defense Secretary Pete Hegsweth’s plans to cut the department’s budget, led to a sell-off.
Short sellers, meanwhile, have been eyeing the stock cautiously. Palantir was recently trading at 76 times forward sales and 153 times forward earnings, among the richest in the stock market.
Palantir has still gained more market cap than it lost, “which is the reason it’s a short,” said one manager who remains short Palantir. (More than $50 billion in market cap has been erased.)
This short seller is among the few who have been so brave. Only 3.58 percent of the float has been shorted, according to Ihor Dusaniwsky at S3Partners. “This has not been a profitable trade for short sellers and the short covering is part of a long-term steady squeeze. Year-to-date mark-to-market losses are $1.16 billion,” he said.
