The history of stock market bubbles usually follows the same pattern. A new disruptive technology appears, a few companies take it public, other companies join the boom with questionable capabilities, Wall Street hangs around and buys up anything on the market that looks like a new toy. The last phase is the bloodiest: only the true champions of change remain standing.
Stock markets and artificial intelligence appear to have entered the most difficult phase yet. AI has fueled the latest rally in the S&P 500 index, as anything remotely connected to its technology sends its stock prices soaring. But the time has come to change gears, and the first to do so are bassists in companies like Super Micro, Lumen or Symbotic.
All three companies have outperformed Nvidia at times this year, delivering returns of over 200%. Now, they’ve collided with several Gotham City-style bear attacks. Several reports are questioning the companies’ accounts and lofty valuations.
Silicon Valley server maker Super Micro opened last week with a market cap of about $36 billion and closed around $26 billion after a report Tuesday from activist short-seller Hindenburg Research noted “clear accounting red flags,” among other issues, and will cause delays in complying with bureaucratic requirements from the SEC, Spain’s CNMV.
None of this is to say that AI won’t help transform the economy and create opportunities for hundreds of businesses, but the stock market magic of turning any AI approach into gold has disappeared.
The market is not easily excited
The market, at least, has lost its innocence and is no longer excited about anything. Investors were cool to Nvidia’s results, even though they beat expectations. Shares fell 6.4% the next day. Nvidia’s results through last week didn’t stop the stocks from qualifying for the next day. After seeing the title soar by more than 700% since the start of 2023, Investors have grown accustomed to Nvidia not only beating expectations, but shattering them.. And that’s why it’s been a massive sales driver.
“We separate the winners from the losers,” says Ken Mahoney, founder and CEO of Mahoney Asset Management. Bloomberg. It’s about separating the wheat from the chaff, and for that, bears exist to correct the excesses of the market. But Mahoney warns that Nvidia and the other big AI players in the Magnificent Seven are consistent with their results and growth.
For Super Micro and the rest of its fellow travelers, results have come “sporadically.” That unpredictability, combined with their rapidly rising stock prices, makes them particularly susceptible to short-selling attacks. About 24 hours after Hindenburg’s report on Super Micro, the San Jose, Calif.-based company said need more time to assess internal controls over financial reporting.
Tuesday was also difficult for Lumen Technologiesgiven that Kerrisale Capital Shares of the fiber optic networking company, which soared from around $1 apiece in July to more than $6.50 in a matter of weeks, fell on the news and are now trading at around $5.
In the meantime, SymbolicSoftBank-backed Intel Corp. has lost 23% of its value in less than two weeks after investors tipped off a brief report claiming drone footage showed nothing happening at some of the company’s sites. The warehouse robotics company has positioned itself as a beneficiary of AI, entering into a joint venture deal with SoftBank to buy its AI-powered systems last July, with its shares trading at more than double their year-to-date closing price on Friday.
As for Hindenburg, it struck again on Thursday with a report accusing iLearningEngines, which describes itself as an “AI platform for learning and work automation,” of falsifying its financial figures. Shares fell 53%, while the company said in a statement that the report contained misleading statements.
Too far, too fast
These are the kinds of changes that happen when markets become obsessed with a new technology, from the invention of radio to the development of the Internet.
“The stock market always has a tendency to go too far, too fast, and then go through a period of digestion,” said John Belton, portfolio manager at Gabelli Funds. “For a lot of these companies, we’re in a period of healthy digestion.”
The benefits of AI continue to grow. Valuations of private AI companies are soaring, as evidenced by OpenAI’s latest funding round. And that’s spilling over into the stock market, where only a handful of publicly traded companies offer exposure to the technology. The result is the kind of momentum that fuels frenzy and valuations soar.
This isn’t the first time investors have turned to companies whose stock prices are soaring on expectations about AI. In March, Hindenburg bet against data center owner Equinix. And in July, Culper Research questioned bitcoin miner Iris Energy’s AI aspirations. “We’re still in a part of the generative AI investment cycle where it’s hard to know the shape of the cycle over the long term,” Belton says.
