AI Stocks are F****d

I really don't like what we're seeing in the AI trade right now. And I do think the CapEx trade AI trade is coming to an end and I think Wall Street is telling you that. Like for an example, momentum stocks have had the worst July in 27 years or their worst month period in 27 years. And that's just one statistic that I will share with you. We're going to look at technicals on some of these AI stocks like Micron and you're seeing on screen. Uh nothing about this chart looks good at all. And this is how most AI stocks look right now. So ladies and gentlemen, if this is your first time to the channel, welcome. What we like to do on this channel is to spot, identify, and execute on exponential opportunities. I've found in my years in the markets chasing FOMO never has led to getting rich. Ever. You have to position before everyone else does. So that's why I'm going to share with you other areas that I believe are significantly undervalued as AI stocks come to an end. And no, I don't think this is a bubble popping kind of a moment. I just think for maybe the next year or so, AI stocks are not going to lead the markets or the the hardware stocks, I should say. They're not going to lead the markets. There's not going to be so much FOMO in hardware that nothing else can work. I think those days are over. And look, we have a lot to talk about in this video, but first things first, I want to share with you guys this post that I made on X last night because I seen more comments around this narrative that people have been saying, right? Every time I talk about you know, the CapEx trade coming to an end because hyperscaler stocks are falling. People don't understand this. People say something like quote "Why would hyperscalers care about their stock price?" Their stock price is everything. Literally everything. Here's why. For this year, hyperscalers, they're going to lose about 50 billion in free cash flow. Meaning they are, as a collective group, spending all of their money and going into debt to fund the CapEx build-out. And you can see on screen the picture of this, right? You went from 250 billion in free cash flow, massive buybacks, very shareholder-friendly companies to literally spending all of their money plus some. Well, Wall Street's expecting the CapEx number to go from about 700 billion this year to about 1.3 trillion next year. Even if hyperscalers can rake in an extra 100 billion in CapEx or or 100 billion in free cash flow next year, like if they go from 250 to 350 350 billion, you're going to have to make up like 3 to 400 billion dollars worth of issuing stock, raising debt, like in bonds, right? So, this chart, if people are correct and the CapEx trade is going to accelerate next year, you're going to see a lot more debt and a lot more stock issuing, which is fine if if hyperscalers are going up as they're spending more money. But as of the last I would say about 2 months 3 months, hyperscalers have begun to sell off as they spend more money. It's impossible for the CapEx trade to continue. Because again, the only way that you can continue to spend on CapEx if you're spending all of your free cash flow, is by selling stock or selling bonds. Number one, if they want to dilute investors and Wall Street is punishing spending, that doesn't work, right? Like if Google came out and we're like, yep, we're going to, you know, spend all of our free cash flow. We're going to dilute investors 5% of the float. The stock's going to fall like 15, 20% over the course of a month. There's the the law of diminishing returns. So, if you do that once, maybe you can do it again, but that second time it's going to hit the stock even more. Till eventually, your stock's down 70, 80% and you're just running things into the ground, right? You can't just dilute investors over and over again. Okay. Number two, if hyperscalers fall 50% from highs, nobody will lend to them. Remember Oracle, their bond blowout a couple months ago? What happens is people say, yep, I don't want to be involved in that. It's directly tied to the stock performance. Right? Remember the worries about OpenAI when Claude was gaining traction? They were trying to raise over a hundred billion dollars and there was a lot of concerns. You had to have like Nvidia and major companies step in and say, yep, we will back this debt. Because private ca- private credit, private capital didn't want to, okay? Now imagine you could have thrown a ticker in front of it. The capital raise might not have happened. At the most basic level, think about it like this. When times are good, everyone wants to lend. Companies that lend are rewarded. Hence, why everyone was throwing money at OpenAI and making partnerships with them when they were dominant in AI. If you announce a partnership with OpenAI, your stock went up. Like Oracle, great example. They were the one of the first on that bandwagon, Microsoft, right? Their stocks did really well as they were making all these commitments to open AI. That has turned. When things turn, nobody wants to lend. The firm that tries to lend 20 billion to the company that stock is 50% off highs loses clients. Imagine if you're the average mom-and-pop kind of person, you don't even understand AI, or you're maybe you made millions in real estate and you have some private, you know, um firm that's managing your money. And you start hearing from this private firm that they're going to lend your money to a company in which their stock's down 50% from highs, you're going to go, "Why are you lending money to stocks that are crashing? Am I at risk here?" People pull their money, right? It's a It's a bad look. This is why Wall Street chases, because ultimately people are selfish. They want to make their own money. That fund manager is going to do what his clients want him to do at the end of the day. If a stock's down 50% from highs and you risk losing clients, you're not going to lend to the company even if it's a great investment, >> [laughter] >> right? Um so, you'll lose clients. So, you kind of lose the the private market. So, Wall Street, they're all great gamblers at heart. They like when stocks go up and they run when they are dead. Nobody will give a about the long-term story with Amazon if the stock is down 50%. And yes, that is the direction we are heading in. If if AI stocks are accurately priced today and we go from 700 billion to 1.3 trillion, which technically you need more than 1.3 trillion to drive upside in AI stocks, but even if we hit 1.3 trillion in CapEx next year from the hyperscalers, yeah, All of them are falling. Google's falling Amazon Meta Microsoft Oracle, they're all dead. They're all going to fall more than 50% from highs. Because Wall Street is no longer rewarding irresponsible spending. And no, nobody will actually give a about the long-term Google or Amazon or Microsoft or Oracle AI story as they continue to spend more and more. That tide has shifted and it is not coming back. You are not going back into an environment where companies are rewarded for spending more. A lot of people would say, "Well, what if they start to show great ROI on the money they've spent?" I would say that's already happened. Right? They're already showing the ROI. They're just spending faster than it's coming in. So, all of these companies are at record earnings, record revenue, record margins, record profits. The problem's not the ROI. The problem is the spending. They're spending faster than they're generating. And that trend has only gotten more significant or worse in the last 6 months, year, or so. And Wall Street's over it. Wall Street's done with it. These These companies used to be some of the best, most friendly shareholder um companies, and now they're not. So, if their stocks continue to get punished for spending more, it's impossible to continue to spend, at least not at the rate that Wall Street is expecting. So, like TSM had okay earnings today, nothing shocking, but their guidance for next quarter was really good. But Wall Street's saying, "If Microsoft's down 30% from highs, or if they raise CapEx again and fall again on earnings, eventually that CapEx number is going to come down." So, it's unsustainable. So, even though TSM and the early AI companies you've seen report, ASML, Penguin Solutions, a whole test systems, and now TSM, they're all saying great things. The problem is not their earnings. The problem is how Wall Street is punishing the spenders. Why? Because we've already seen this happen before. This happened in 1999 through 2000, also. This is not the first time this has happened. In 1999, the companies that spent the most, their stocks got sold off. A lot of the Cisco customers, their stocks peaked in like the first quarter of 1999. Cisco didn't peak until, I believe it was March 20th or 13th, something like that, of 2000. So, yes, if the hyperscalers are driving the CapEx trade, you bet your ass sentiment around their spending is critical to monitor. Yeah, sure, they can all go to zero free cash flow. That's whatever. The problem is they have to start raising debt, selling stock, and that lending market begins to dry up as the stock comes down. So, again, we've already seen the playbook of this before. Again, in 1999, the companies that spent the most, their stocks got sold off. Lending dried up, and there wasn't enough cash flow to fund operations. This is why this time is different, because in 1999, if you were spending crazy amounts of money, you needed capital like capital raises. You needed to sell stock or go to the bond market to literally keep your company alive. Hyperscalers can slow down CapEx. These are some of the most profitable companies in the world. They're going to be fine. There's no risk of that. The risk is on the AI uh beneficiaries from the spending, right? So, like you're not going to get to that moment where, "Oh my gosh, Microsoft needs a capital raise or they're going to go bankrupt." >> [laughter] >> That's not going to happen. But, again, we're following the trajectory of the 1999 companies, and that's why you had a bubble and so many companies went bankrupt is because the lending dried up. Why? Because the stocks went out of favor. You know, long before, you know, the Ciscos of the world, you know, revenue slowed down. So, right now you're still seeing AI stocks having good revenue. Part of that is because if companies are spending a lot of money, like if Microsoft or Meta have 30 different projects going on right now, of course they're going to finish those products. Of course, the you know, things are going to keep going. But, the question is how sustainable is it? The only thing worse than having 30 projects going and needing to spend more is canceling those products and having 30 stalled projects. Like, some of the spending is going to continue. Next year, I think we're going to do 900 billion in CapEx. I think the number is going to grow, but I think it's going to grow at a much more responsible, sustainable rate. And the problem is for a lot of AI stocks, you're not priced for that, right? You're priced for many years of exponential growth in CapEx. And specifically like some of the memory stocks, they're priced for very constrained um like supply environments and having a lot of pricing pressure. And it it the tide is turning on that. Wall Street's saying, "Yep, this is not going to last." So, be very careful when you're seeing like a Micron down 32%, 33% from highs and assuming it's a good deal. Wall Street is voting with their dollars today. And they they have been for the last couple of weeks. So, let me bottom line this segment of the video, okay? There's two ways companies can fund negative free cash flow. Once they burn through all of their cash, there's two things they can do. They can sell stock, which is fine when stocks are doing well, when their stocks are going up, when they're being rewarded for spending. We're not in that environment anymore. And they can sell bonds. And yeah, sure, they can still sell bonds, but as their stocks get lower and lower and lower, there's less people willing to lend. Yields go up on those bonds, and it's kind of a vicious cycle, right? If yields go up on the bonds, people get more worried about the stock, they get more worried about the health of the company, their ratings come down. It's not a good scenario. So, you can really only spend irresponsibly when the markets allow it. So, this is why I've been focusing on how the markets have been treating hyperscaler spending for a while now. Next week, we are going to have hyperscalers that report earnings. And what their CAPEX is, and how the stocks react to earnings, is critical for the AI trade. Now, I think good news is, if AI stocks fall, as they have been, other areas are going to take the baton, right? Software, and cyclicals, and non-AI industrials, non-AI financials, and small caps. These are areas that will lead. So, you're actually going to have a net positive impact on the market. You can see this in the S&P. I mean, the S&P in the last, you know, since um since June 26th, the S&P has went from a low of 716 back up to 753. The S&P looks really good. It has a bull flag pattern. You're you're above the downtrending trend line. It looks like the S&P wants to break out to a new all-time high. The Nasdaq, on the other hand, looks a lot worse. Yeah, you have the bull flag pattern, so not all hope is lost, but you're not above the downtrending line. You're barely You're finding support barely at the uptrending line. You're below your 20-day and 50-day moving average. S&P is you know, um 1% higher than its 20-day moving average. Nasdaq is what? 1 or 2% 1 and 1/2% below its 20-day moving average. So, yeah, the triple Qs it are really underperforming. They don't look good at all. The S&P does. So, this sell-off in AI stocks is just going to fuel this new bull market, this rotation in the equity market. And that's what you've seen in the last couple of weeks. Now, again, I posted this on X last night. I shared uh Micron, Sandisk, and Western Digital charts. They just look terrible, and these stocks are down another 5 to 10% today, so the charts look even worse. Just across the board, really no matter who you're looking at, the charts look terrible, you know? Even like a you know, AMD for that matter. AMD doesn't look as bad, but doesn't look great. Intel? Yeah, looks really bad. Really, really bad. I mean, look at Nvidia, right? Nvidia It's kind of been underperforming. It's bounced a little bit. Nvidia doesn't look good, either. You know? No matter Like, you can't find a good-looking AI stock chart right now. And while I don't put a lot of weight on technicals, it's something that I'm looking at on top of everything else and saying "Yeah things have definitely shifted." SanDisk, I mean, this stock looks like it can't find a bottom. SanDisk is hitting lower lows. I mean, compared to its low on July 7th, SanDisk is now below that, well below its 20-day, well below 50-day moving average. The question is how much do you have to reprice these stocks? Because I still think CapEx is going to grow, but instead of being 1.3 or 1.5 trillion next year where crazy expectations are or were, I think you're going to be at 900 billion for CapEx next year. That just means less pricing power in memory stocks. That still means strong demand. That still means things are going to grow, but not as fast as expected. You can also see this chart here. It says historic sell-off for momentum in July. Goldman Sachs high beta momentum index is down 24% month-to-date through the first half of July. The worst performance since April of 2009. Morgan Stanley's tech momentum index 17-day rate of change is down 35%. The worst ever recorded through its 27-year history. I mean, this is worse than any of the dot-com bubbles peaking. This is way worse than '07-'08. This is way This is down there with like the COVID crash. So, like putting all of this together, it just doesn't look great at all as we have hyperscaler earnings next week. And look, there's a chance that hyperscalers come out and they raise CapEx more than expected and AI stocks go through another rally. The point I'm making here is is not necessarily trying to time it. I do think the CapEx trade is over with, but even if I'm wrong and hyperscalers spend more and their stocks come down, the clock is ticking here. But again, the playbook is actually really simple here. And I think if you're watching this video, you have an early kind of indicator or indication of what's going to outperform. Hyperscalers, they're going to catch a bid. Some of them are going to spend more. Some of them are going to slow down spending. The ones that slow down spending are the opportunity. Maybe that's Microsoft, maybe that's Amazon. I don't know who it's going to be or what the composite's going to look like here, but hyperscalers in general could be attractive. Software, software's going to catch a bid as hardware slows down. Cyclicals, non-AI industrials, non-AI financials, these are going to be also very attractive. Now, what do, you know, non-AI financials look like? Credit card companies, um regional banks, insurance, things like that. You can see today Goldman Sachs is down 4%. Goldman is effectively an AI stock. Robinhood is down 2 and 1/2% today. I wouldn't say that's an AI stock, but um it's being treated like that today. So, Robinhood might be an opportunity if it does come down, all things considered. Morgan Stanley, down 4%. That's considered an AI stock. Wells Fargo, up 1% today. That's not really considered an AI stock. And what it is is Goldman Sachs, Morgan Stanley, JP Morgan, you know, City, some of these banks that are down a lot today, they've been doing a lot of the underwriting of the debt, the IPOs, the lending around AI stocks in the private market. And that has really helped those companies out. So, the regional banks, the credit card companies, you know, uh the these are not companies that are underwriting debt for, you know, AI companies or private credit, right? Cyclicals, simply areas that have been left behind. Software, again, areas that have been left behind. These are going to be areas that can finally catch a bid. People can rotate back into them as um, you know, hardware takes a breather. So, these are my thoughts on this. Obviously, could I be wrong? Could the AI trade last another quarter or or whatnot? Of course, we'll see what hyperscalers say um, next week. And it's not even really about their current CapEx plans. It is more about how they forecast CapEx developing over the next couple of years. If they give us any kind of an insight to that, that's what will drive AI stocks because the question is not necessarily what's happening today, but how sustainable is this for how long? Everyone knows this CapEx cycle is unsustainable. But, the question is for how long? And I think simply based on the things that we've covered in this video, it is clear the CapEx trade the the the winners from the CapEx trade are now becoming the losers. And the faster you can identify this and rotate your portfolio to position into other areas that stand to benefit, the better off you're going to be financially. I think this is one of the most opportunistic markets we have ever seen because, you know, everyone's crowded in the same 30 stocks or so, and you're about to have what I believe to be a massive rally in other areas of the markets that are still trading at bottom of the barrel kind of valuations. You know, PEG ratios less than one. I mean, these are where the opportunities are. If you guys want to come trade and invest alongside of us, that link is down below in the description of today's episode. Stay tuned for the new um, tier that we're going to add. It's going to be about $5 a month. There's going to be some tools over there in Discord. You guys can come, you know, crowdsource, you know, information. Come ask me questions. we can be involved over there. Um I want to make it very accessible to to everyone. We do have to charge something because APIs are not exactly cheap. So, um yeah, that's that's I I wanted to do it for free, but APIs are not exactly cheap, making sure, you know, scammers don't get in there is not exactly cheap, either. So, uh stay tuned for that, still working on that, but that will be coming soon. That is it. Have a great rest of your day, but I will see you in the next one.