1) Over the past week, we've seen wild swings in AI stocks (downward) and software stocks (upward, until yesterday). We now know part of the reason for this: the implosion of major hedge fund Situational Awareness...
It's run by 24-year-old former wunderkind Leopold Aschenbrenner (see this glowing profile in the Wall Street Journal from June 8).
The fund was up 439% year to date through June and peaked at $45 billion in assets on July 1, thanks to concentrated bets on public and private AI stocks – and shorting ones perceived to be victims of AI, such as software stocks like Adobe (ADBE).
But when his stocks started moving against him, Aschenbrenner – whose fund was reportedly leveraged five times – got hit with margin calls. He had to scramble to unwind his positions and try to raise money (see this Financial Times article).
He failed to do so and had to sell the bulk of his holdings to hedge-fund giant Citadel, as this WSJ article reports.
As a result, Aschenbrenner's fund has crashed 67% this month, causing him to write to his investors (in the understatement of the year): "We let you down this month."
What a story of greed, hubris, stupidity, and a total failure of risk management! Too bad Charlie Munger isn't around to analyze this – he would have had a field day with it...
(And the whole situation has led to plenty of hilarious memes – like this one that links Aschenbrenner to two other reckless speculators.)
Aschenbrenner layered on risk after risk. He was investing in only one sector, in companies that are difficult (if not impossible) to value, partially in private (and therefore illiquid) securities, with a high degree of speculation and volatility.
On top of this, he shorted stocks that would move inversely to his long book, introducing more volatility into his portfolio. And then he leveraged up five times!
These are the mistakes made by two types of people: the young and inexperienced, and the true believers. Aschenbrenner was both.
Bloomberg's Matt Levine notes:
[If] you are all-in on this thesis, you might be more than all-in on this thesis. You won't put 100% of your money (and your investors' money) into the AI boom. You'll put, like, 300% of your money into the AI boom. You'll borrow money to lever up your bets on the AI boom. As your AI stocks go up, you'll borrow more to buy more. Getting a 200% return on your money by buying SK Hynix stock is great, but getting a 1,000% return on your money requires borrowing more money to buy more stock.
This is a naturally long-term trade...
But Aschenbrenner had short-term money (I don't know what his redemption terms were, but presumably monthly or quarterly). He levered this up with even shorter-term money – callable literally on a moment's notice – as Levine explains:
If you are a hedge fund borrowing money from banks to buy AI stocks, the way that borrowing works is, uh, if the AI stocks go down you get margin calls? Like, that day? Your money is not locked up for the long term, and you might have to repay it at any time. There is a mismatch between your thesis, which is measured in decades, and your funding, which is kind of overnight. The AI thesis is up a ton over the past two years, but it is down quite a bit over the past two weeks...
The lessons here for everyday investors are simple: It's OK to invest in risky/speculative stocks or sectors, but recognize what you're doing, and keep position sizes and total exposures small. And don't use leverage!
2) What you should do instead is find a handful of great companies, buy their stocks at reasonable prices, and then hold them for a long, long time. That's what my team and I at Stansberry Research have been doing successfully for more than two decades.
Exhibit A is Microsoft (MSFT). We recommended the stock at $30.77 in our February 2012 issue of Stansberry's Investment Advisory (subscribers can read it here) and have never wavered in our conviction. Since then, the stock has paid out $28.93 per share in dividends.
It soared 15.5% yesterday, closing at $451.10, after reporting strong earnings (see the earnings release here). Its $450 billion increase in market value was the greatest one-day gain by any company ever, as reported by the WSJ.
Revenues of $90 billion were up 18% year over year, beating estimates of $87.6 billion. This was led by Azure and other cloud services' revenue growth of 43%. And adjusted earnings per share ("EPS") rose 23% to $4.74, far surpassing expectations of $4.24.
There have been concerns about hyperscalers like Microsoft spending too much on capital expenditures ("capex") driven by AI investments, which have turned cash flow negative – as Alphabet (GOOGL) did last quarter for the first time in its history as a public company.
But investors were relieved to see that Microsoft generated nearly $20 billion in free cash flow ("FCF"), despite more than doubling capex. And overall, it was a very strong quarter.
With consensus analysts' estimates for the next year at $19.50, Microsoft's stock trades at a modest 23.1 times forward earnings. That's a market multiple for one of the greatest businesses of all time, which makes no sense.
3) Another open recommendation in our Investment Advisory portfolio is Amazon (AMZN), which we added in February (subscribers can read our report here).
The company reported strong earnings after the close yesterday (see the earnings release here and slide presentation here). This drove shares up as much as 15.5% this morning.
Revenues rose 20% year over year to $200.6 billion, above estimates of $196.5 billion, driven by a 37% surge in Amazon Web Services ("AWS") revenue. Operating income and operating cash flow rose 43% and 33%, respectively.
However, trailing-12-month FCF was negative $7.6 billion because capex rose 69% to $54.2 billion. Amazon raised its capex forecast for the year to $220 billion – a $20 billion increase.
When Alphabet reported negative FCF and raised its capex guidance last week, its shares dropped. But Amazon's are up because of bullish comments from CEO Andy Jassy:
We've long believed AWS could become a few-hundred-billion-dollar-revenue business, and now believe it'll be at least double that – and very possibly be a trillion-dollar annual revenue business for us in time.
At around $264 this morning, the stock is trading at 26.3 times next year's estimates of $10.03. That's a slightly above-average multiple for a far above-average business, which makes no sense.
Amazon remains my favorite big-cap tech stock for 2026.
4) Lastly, Meta Platforms (META) dropped 8% yesterday after reporting disappointing earnings (see the earnings release here and slide presentation here).
Revenues grew 28% year over year to $60.8 billion, slightly above estimates. That's thanks to a combination of a 3% increase in user activity, a 14% increase in ad impressions, and a 12% rise in price per ad.
These are remarkable numbers – and evidence that Meta's investment in AI is paying off with better ad targeting.
However, expenses rose 55%. As a result, EPS declined 13% to $6.18, badly missing expectations of $7.22. Revenue guidance for next quarter was slightly below expectations as well.
Operating cash flow jumped 25%, but, as with the other hyperscalers, FCF tanked (though remained slightly positive) due to an 83% increase in capex.
Unlike Microsoft and Amazon, investors are skeptical that Meta's rising capex will pay off, as this WSJ article notes:
Meta is the most financially stretched of the biggest tech companies. Its ability to generate returns from artificial intelligence hinges almost solely on ad sales. And it has no record of building successful new businesses beyond its core social-media franchise.
Those flaws are coming into sharper focus as the AI spending boom pushes into overdrive. Meta is anticipating capital expenditures of around $137.5 billion this year – a total that analysts expect to put it into negative free cash flow territory in the latter half of the year for the first time since its IPO in 2012. The company will likely fall deeper in the hole next year, when projections via FactSet suggest it will burn through more than $20 billion in cash.
I think the concerns are overblown. This reminds me of when investors lost their minds about Meta's big investment in the metaverse, which briefly caused the stock to drop below $100 in late 2022 – just before it took off. CEO Mark Zuckerberg is rational – if Meta's capex isn't paying off, he'll scale it back.
At yesterday's closing price of $539.03, the stock now trades at a mere 15.3 times next year's estimates of $35.12. That's not quite as low as the 12.9 forward multiple it reached in late 2022, but it's close.
At this price, it's now tied with Amazon as my favorite big-cap tech stock.
5) The capex surge among the hyperscalers is stunning, as you can see in this WSJ chart:
To own or recommend these stocks, you must believe that these companies are being rational in their heavy AI investment. I think there's an obvious AI bubble, which is in the process of bursting.
But for reasons outlined in my July 23 e-mail, I think these four companies will be among the winners – especially now that their stocks are, on average, trading at a market multiple.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. After four weeks in Europe, I flew home this morning. My parents, aunt, and I spent the last two days in Munich, Germany visiting Dachau, the notorious Nazi concentration camp, and Nuremberg, site of the famous post-WWII trials of the Nazi ringleaders:
