Shares of Tesla (TSLA 1.08%) and Palantir Technologies (PLTR 1.56%) have advanced 109% and 385%, respectively, in the past year. But the billionaire hedge fund managers below bought the former and sold the latter in the third quarter.

• Ken Griffin of Citadel bought 1.1 million shares of Tesla, increasing his position by 396%. Tesla now ranks among his 25 largest holdings excluding options. Griffin also sold 5.1 million shares of Palantir, reducing his stake by 91%.
• Israel Englander of Millennium Management purchased 225,760 shares of Tesla, increasing his position by 51%. Meanwhile, Englander sold 4.4 million shares of Palantir, reducing his stake by 90%.

I mentioned Griffin and Englander first because they run two of the three most profitable hedge funds in history, according to LCH Investments. That makes both fund managers good sources of inspiration. But other reputable investors either bought Tesla or sold Palantir in the third quarter.

• Andreas Halvorsen of Viking Global bought 436,272 shares of Tesla in the third quarter, opening a small position. It represents less than 1% of his portfolio, but the purchase is noteworthy because Viking is the seventh-most profitable hedge fund in history.
• Stanley Druckenmiller of Duquesne Family Office sold 728,255 shares of Palantir, reducing his position by 95%. Importantly, while Druckenmiller only manages his own money today, he previously ran one of the most successful hedge funds in history, Duquesne Capital.

The trades above took place in the third quarter, which ended in September. We won't learn which stocks the fund managers bought and sold in the fourth quarter until the file 13F forms in mid-February. So, investors need to familiarize themselves with Tesla and Palantir before making any decisions.

Tesla: The stock several hedge fund billionaires bought in the third quarter

Tesla delivered disappointing financial results in the fourth quarter. The company reported its first decline in annual deliveries since 2020. Total revenue rose only 2% to $26 billion as sales growth in the energy segment offset a decline in the automotive segment. Operating margin contracted 2 points to 6.2%, and non-GAAP (adjusted) net income increased only 3% to $0.73 per diluted share.

However, management provided encouraging commentary on the earnings call. CEO Elon Musk is confident that Tesla will launch an unsupervised version of its full self-driving (FSD) software in California this year, and possibly other states, too. The company also plans to introduce an autonomous ride-sharing (robotaxi) service in several cities by the end of 2025.

Alphabet's Waymo is the only U.S. company that currently has a functional autonomous ride-sharing platform. But Tesla could be a disruptive force given that it has more autonomous driving data and its cars cost much less to build. Musk has previously estimated robotaxis could push Tesla's gross margin to 70%, which would be a substantial improvement from 16% in the most recent quarter.

Wall Street expects Tesla's adjusted earnings to increase 19% over the next four quarters. That consensus makes the current valuation of 165 times adjusted earnings look outrageously expensive. Importantly, Tesla never traded higher than $263 per share in the third quarter, meaning the stock was at least 34% cheaper than it is now at $400 per share.

Additionally, I think the hedge funds that bought Tesla during the third quarter were betting that Donald Trump would win the presidential election. The ties between Musk and Trump could benefit Tesla where autonomous driving regulations are concerned. Regardless, prospective investors should wait for a better entry point. I think the stock is worth owning, but I also believe better buying opportunities will present themselves.

Palantir Technologies: The stock several hedge fund billionaires sold in the third quarter

Palantir sells data analytics software to commercial and government customers. Its core platforms, Foundry and Gotham, let clients integrate information, develop machine learning (ML) models, and query data with analytical applications. Palantir also provides an adjacent artificial intelligence (AI) platform called AIP, which adds natural language processing capabilities to Foundry and Gotham.

Mark Giarelli at Morningstar thinks Palantir can disrupt the traditional approach to data analytics, where information is gathered, studied, and discarded. "Palantir instead creates a read-write loop where the software learns and improves," he wrote in a note to clients. In other words, Palantir helps clients continuously optimize workflows, rather than starting the analytics process from scratch each time.

Palantir reported strong financial results in the third quarter. Its customer count climbed 39% to 629, and the average existing customer spent 18% more. In turn, revenue increased 30% to $726 million, the fifth straight sequential acceleration. And revenue growth may continue accelerating because remaining performance obligation rose 59% in the quarter. Meanwhile, non-GAAP earnings increased 43% to $0.10 per diluted share.

Strong financial results notwithstanding, most analysts view Palantir as wildly overvalued. Wall Street expects adjusted earnings to grow 31% over the next four quarters. That makes the current valuation of 230 times look absurdly expensive. Consequently, among the 23 analysts who follow the company, the median target price is $39 per share. That implies more than 50% downside from its current share price of $81.

I suspect the hedge funds that sold Palantir did so because of its alarming valuation. No other company in the S&P 500 has a larger discrepancy between its current share price and median price target, though Tesla is not far behind. For that reason, I would wait for a much cheaper price before buying shares. Like Tesla, I believe the stock is worth owning, but the current valuation is concerning.