The stock has already fallen as much as 30% in just a few days. It also shed $400 billion in market cap in a single day, which was the second largest one-day wipeout in stock market history. And while it did recover some losses yesterday, it's still 22% off of its highs. Keep in mind, this is all happening before any of the lockups have even expired, which means that the stock has yet to go through the real test, which is when thousands of investors will choose whether to hold the stock at an unreasonable valuation or sell it and then go buy themselves a house or a boat or perhaps even a plane. I know what my money's on.
Welcome to Profy Markets. I'm Edson. It is June 24th. Let's check in on yesterday's market vitals. The major indices declined as tech stocks dropped around the world. More on that in a moment. Meanwhile, oil continued its decline. And finally, the dollar hit its highest level since November on growing expectations for rate hikes this year. Okay, what's happening?
Tech stocks are selling off and the pain is hard to ignore. So far this week, the NASDAQ 100 is down roughly 4%, meaning that the index has shed over a trillion dollars in the last 2 days alone. Chip makers are among the hardest hit, with an index of semiconductor companies dropping 8% yesterday. The rout has gone global, too, with Asian stocks taking a steeper dive. South Korea's Kospi is down 10% from near record highs. But the biggest drop we've seen was SpaceX. The company issued a $25 billion bond offering to finance its AI operations, and over the past 3 days the stock has fallen around 20%. So for more on this latest drawdown in the tech market, we're speaking with Gil Luria, head of technology research at D.A. Davidson. Gil, good to see you. A lot of pain in the tech sector. The chip stocks especially: AMD is down 5% this week, Nvidia is down 5.5%, TSMC and Broadcom down 8%. What is going on here? Why are investors so concerned right now?
I'd say I'd characterize it as a lot of volatility. The dispersion in outcomes for next year is bigger than it's been in a while. If you think about it, if AI goes well, GDP in the US may grow 5% next year. If AI rolls over and the cycle is over, GDP may only increase by 1 or 2% next year. Usually, we're trying to figure out if GDP is going to grow 2.8 or 3.2. Right now, the range of outcomes is really big. So, anytime something happens in AI that makes people more optimistic, these semi stocks continue to run. And anytime there's a sense in the market of maybe we're close to the top, then we get these big corrections. So most of what we're seeing right now is just tremendous volatility.
What do you make of what's happened with SpaceX here? I mean, we talked about it last time. I think we talked before it went public, or at least maybe in the first few days.
And it's been kind of a stunning drawdown. I'm not personally that surprised by it because, I mean, I kind of thought this—
You were very vocal about that. You were very vocal, and I think that was very helpful to investors going in, that you spent a few days preparing investors that there's going to be a first-day pop, which happened, and then that the stock may come down from there. And that's happened without all those things that we talked about last week, which is there's going to be shares unlocked and there's going to be a lot of activity around index inclusion and non-index inclusion. So, another place where we're going to see even more volatility, but thankfully you did prepare at least your viewers and listeners for this outcome.
Yeah. I mean, just on that point, we haven't seen those lockup expirations yet. I mean, this is, as you say, it seems to be just pure volatility, and it seems to be triggered by this $25 billion bond offering to, I guess, finance the AI buildout. I mean, if we were to sort of draw that to its logical conclusion, I assume that means something like investors are worried about the fact that they need to raise more money to spend more money on AI. Where is the return going to come from? Which goes back to AI bubble concerns. Where is the ROI on this technology? Do you think that that is sort of fueling the anxiety here? Is that what is ultimately triggering people's decision to sell?
Yeah. All these things are contributors to this. I mean, they just went out and raised $85 billion in equity capital, and now they're raising another 25 of debt. Now, some of it is to pay other loans, some of it may not be. Either way, they need to invest very substantially in this AI compute. Now, to be fair to them, this is a business that's in tremendous transformation right in front of our eyes, right? From a business that had most of its revenue from Starlink and then about a quarter of the revenue from space exploration. Now with the Anthropic, Google, and Reflection contracts, most of their revenue is coming from a neocloud business, providing data center capacity to AI labs. So their business is completely different than it was a year ago. This business, the business that is now their biggest business, this neocloud business, is incredibly capital intensive. So, they do need a tremendous amount of capital. Now, part of this is they're monetizing existing data centers, but they also want to build a lot more data centers, not to mention they want to build some of them in space.
What do you make of what's happened to big tech in this sell-off as well, because they've really been dragged into this? Alphabet had a pretty significant selloff. That was maybe a different story because a couple of their AI researchers left the company and then went over to a competitor, which got a lot of investors concerned. But also Amazon's down 3% this week, Meta down 2%, Microsoft down as well. What do you make of big tech valuations and what is their role in this story?
So the sentiment around those companies is they're spending too much money, they're not going to get the return. We would rather invest in the companies that they're spending on. So mostly chip companies as opposed to the companies that are spending their cash flow on those chips, and that's what the market is reacting to now. But I would say that the Google changes are actually very important. The two people that left Google for the frontier labs are two of the only people in the world that can understand AI right now. You can really count the people in the world that can figure out how to develop a better model — it's probably less than 100 people globally — and the two that left Google are probably top 10. So the fact that they said Google is so bureaucratic that Google DeepMind will not lead us to superintelligence, we should go to OpenAI and Anthropic, is actually a sign that there's maybe cracks in this notion that Google is the AI winner, which is how it got from a stock in 180 to a stock over 350. So that's specific to Google, but broadly speaking, investors don't believe the returns are coming. It doesn't matter that Amazon, Microsoft, and Google are telling us, 'Of course, the returns are coming. We've already sold this data center capacity. We know a cost. We know we have a markup. We know we have a return.' Investors are just not buying that right now.
How do you sort of justify or explain what's going on in terms of just the delta between some of the valuations that we're seeing in AI, which are certainly overpriced? I mean, SpaceX would be sort of ground zero, the perfect example, trading at, you know, 100 times revenue, last year's revenue. But then there are also companies like Microsoft, like Meta, and their price-to-earnings multiples are historically quite low right now. I mean, how do we sort of make sense of this market if you have this massive difference between all of these different players in AI?
The market is being inconsistent. The valuation of Nvidia, Microsoft, I mean, to some extent Amazon, is a valuation that implies that this AI thing isn't going to work out and we're at the peak of the cycle and it's going to roll over next year. The valuation of Cerebras and Olo and all these optical companies, and Intel, implies that the cycle will continue through 2030. So the market is being inconsistent right now because the people that don't believe in AI are unwilling to buy those big companies, but then the people that do believe in AI are only buying the marginal AI participants. We see that as an opportunity to buy great companies like Microsoft, like Nvidia, like Micron at attractive valuations, because if this isn't peak cycle, if this AI thing actually works out, those stocks will be a lot higher in a year or two.
Do you have any concerns about what we're seeing in the macro environment specifically? I mean, it's kind of amazing and remarkable the fact that what's happening in Iran does ultimately affect a lot of these names, because ultimately it could mean higher interest rates if we do see rate hikes, which is probably one of the biggest anxieties for investors on Wall Street right now, and no one seems able to agree. Are you looking at interest rates? Are you concerned about interest rates, especially as it relates to those names and whether or not they are buying opportunities?
Well, absolutely. And right now, again, the market is of the mind that Iran will not be an issue going forward. Therefore oil prices will remain low, inflation will remain low, and we will not need to increase interest rates. But that obviously, as we've noticed over the last four months, can change very quickly.
