Headlines today (5 November) are clamouring over a possible AI bubble bursting. The FTSE 100 seems steady for now. But Asian and US markets are a bit rattled.
The tech-heavy Nasdaq fell 2% yesterday in the midst of Q3 reporting season, even though earnings look generally pretty decent.
It comes as famously bearish hedge fund manager Michael Burry — of The Big Short movie fame — revealed short positions of over $1bn on leading AI lights Nvidia and Palantir.
Nvidia has fallen 5% since close on 3 November, dropping back below its $5trn market cap. Palantir dipped 10%. Both are still nicely up year to date though, by 48% and 152%, respectively. So the sky isn’t quite falling yet.
Tech stock falls 15%
Let’s take a look at Super Micro Computer (NASDAQ: SMCI) to see what happens when a tech growth stock fails to meet lofty expectations. Super Micro designs high-performance servers and storage, and has been a big player in supplying the AI boom.
The company posted first-quarter earnings Tuesday, after US markets closed. The results fell short of analyst forecasts, and traders punished the stock. From close the previous day, we’re looking at a 14% fall at the time of writing.
Short-term panic?
But it’s just one quarter. And I really don’t see any significant bad news. The company spoke of “design win upgrades“, after a major customer requested changes to a high-volume order.
It means about $1.5bn in revenue has been delayed to the current quarter, with CEO Charles Liang saying the slip is “largely caused by the complexity of these new graphics processing unit racks, which require intricate integration, testing, and validation“.
But right now, it doesn’t look like traders have much time for patience.
Sell-off or shake-out?
Looking at other fallers, Arista Networks is down 12% in the sell-off despite just reporting strong Q3 demand for data centre networking. And Advanced Micro Devices has dropped 6% even after beating expectations with record quarterly revenue. It got off comparatively lightly.
OpenAI CEO Sam Altman has previously said “Are we in a phase where investors as a whole are overexcited about AI? My opinion is yes. Is AI the most important thing to happen in a very long time? My opinion is also yes“.
Altman expects some people are going to lose a lot of money on AI. And I think so, too. But it’s always like that with a new technology boom — canals, railways, aviation, internet…
I still expect to see some very big winners, even from today’s share prices. But right now a lot of money is being thrown indiscriminately at anything remotely AI. And I see some sort of shake-out as inevitable.
What to do?
In the early days, it’s impossible to tell the difference between a total sell-off and a focused shake-out. In reality, I see a good chance of the former turning into the latter.
I remain convinced that long-term investors should — carefully — consider today’s AI leaders, including Super Micro. Personally, I’m waiting to see what happens next.
