Tech Stocks Fall...Is the AI Bubble Popping?

I’ve spilled endless digital ink on these digital pages warning of an artificial intelligence bubble. See here, here, or here for my skepticism of a highly valued market led by AI stocks that were driven by hype, not fundamentals.

Last week, some of that bubble started to unwind as NVIDIA fell 9.8%, Microsoft fell 3.6%, and Meta Platforms fell 4.4%. Weaker-than-expected guidance from equipment supplier ASML was the cause and that will put even more focus on earnings. The last two years haven’t seen anything but a surge in AI demand and that pushed stocks higher, but the stakes are higher than ever as the industry matures and any weakness will be punished.

The Asymmetric Portfolio finally benefitted a bit from not being over-exposed to AI. But the next few weeks will determine if my value on fundamentals over hype will pay off.

In Case You Missed It

Here’s some of the content I put out this week. Enjoy!

AI Reality

The next few weeks will tell us a lot about the future of AI investment. But I wanted to note a few startup “exits” that should be cause for concern because it’s startups that provide the asymmetric upside for investors and employees.

• Microsoft has invested over $10 billion in OpenAI and is now diversifying to run other models, Meta’s Llama model, and is investing in other AI startups.

• Inflection AI was “acquired” by Microsoft in a convoluted deal that involved hiring the company’s staff and licensing the technology developed at the startup. The price paid was enough to make investors whole, but not provide a return on the $1.525 billion invested in the company.

• Amazon made a similar “non-acquisition acquisition” of Adept AI the involved staff moving to Amazon and getting access to the company’s technology.

Usually venture capital deals aren’t something I would focus on, but the dollars and details are important. Microsoft, Google, and Amazon have used their cloud — and access to NVIDIA chips — to fund startups through credits, or use of the cloud to train models and perform inference.

It was a non-cash investment structure that gave big tech access to startups and startups much-needed access to chips.

But the biggest names in AI startups are being acquired for what appears to be breakeven deals to appease investors. Put bluntly, the businesses they built appear to be worthless.

And so begins the questions about AI business models.

I can’t find a record of any of the AI startups being profitable or many/any public companies (outside of NVIDIA) making a profit from AI. Yet, earnings multiples have exploded in the hope that there will be some future profit at the end of the AI rainbow.

If early earnings are any sign, the AI bubble is starting to lose its luster.

Goldman Sachs questioned the investment made in AI and Sequoia asked the $600 Billion Question.

If AI isn’t all it’s cracked up to be, the market will be in for a rough few months. Are you prepared if the AI bubble pops?

Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.