1) This week, I've written about the likely bursting of the AI bubble (see my past three e-mails). And my prediction has already started to come true with the implosion of my least-favorite AI stock, CoreWeave (CRWV)...
It tumbled 15.5% yesterday and was down as much as another 10% this morning on mounting concerns that the company won't be able to service its massive debt.
This is reflected in its bonds now trading at a distressed level, as you can see in this chart posted on X by Chamath Palihapitiya of Social Capital:
I first warned about the stock in my January 28 e-mail, when it closed at $106.02. It's down around 40% since then.
Back then, I said the first stocks to collapse will likely be the smaller companies with insane valuations whose entire businesses (and stock prices) are dependent on AI – like CoreWeave:
The stock has more than doubled since it went public last March. And as of yesterday, it has a $57 billion market cap, equal to more than 17 times trailing revenues.
It doesn't have a price-to-earnings multiple for this year because it's expected to lose money. But if you believe analysts' 2027 estimates of $2.26 per share (I don't), it's trading at nearly 50 times earnings two years out...
If you want to ride the AI bubble through the blow-off top, then stocks like CoreWeave will soar the highest – but also crash the fastest.
Then on August 24, with the stock at $86.25, I analyzed the company's financials – which were among the ugliest I've ever seen. I concluded:
Net debt of $46 billion is nearly equal to CoreWeave's market cap of $48.5 billion, giving the company an enterprise value of $94.5 billion. That's ridiculous.
CoreWeave investors are betting that the AI boom will expand even further, allowing the company to turn profitable and pay off its enormous debt load. Not likely...
I think what they're really betting on is that someone will buy their stock at a higher price at some point in the very near future – the very definition of speculation.
So today, I'm adding CoreWeave to my "Stinky Six" list of stocks to avoid and renaming it the "Stinky Seven."
The stock is down around 26% since then. And I don't think it'll be long until it hits its ultimate destination – zero.
2) My friend Chris Irons (aka Quoth the Raven on Substack) was also early in warning about CoreWeave. And in a missive yesterday, he wrote about the broader implications of the company's possible failure:
The larger problem is that I think CoreWeave represents something potentially much bigger than one troubled stock. Across the AI ecosystem, investors have increasingly treated capital expenditures as though they were automatically synonymous with future profits. Chip manufacturers invest in infrastructure companies, infrastructure companies borrow money to buy chips, cloud providers sign enormous agreements with AI developers, and AI developers raise money from the same technology companies providing their computing infrastructure.
None of these arrangements is inherently improper, but the circularity should make investors question how much genuinely independent, profitable end-user demand ultimately supports the spending. As I've written repeatedly, spending tens of billions of dollars on AI infrastructure doesn't automatically create tens of billions of dollars in economic value...
And perhaps the most important point is that none of this requires the AI revolution to fail. Artificial intelligence could transform the global economy, Nvidia could continue producing extraordinary hardware, and demand for computing power could remain enormous for decade and CoreWeave shareholders could still lose a fortune.
In a follow-up essay the same day, Chris highlighted the circular financing in the AI sector and the dilemma that it poses for Nvidia (NVDA):
If CoreWeave were to go full on equity distressed, I think it could trigger a much broader reassessment of the entire AI infrastructure financing model. Suddenly, investors might start questioning the economics of other neocloud providers, the value of GPUs being pledged as collateral, and the sustainability of the enormous capital expenditures underpinning the AI boom. That could create problems for Nvidia itself, whose extraordinary growth has been fueled in part by precisely this infrastructure spending.
That almost forces Nvidia's hand, doesn't it? Let CoreWeave collapse and risk setting off a chain reaction across the AI trade, or throw good money after bad in an attempt to keep the whole thing afloat.
He concluded:
Nvidia could ultimately find itself damned if it does and damned if it doesn't. Intervene, and risk committing more capital to a potentially deteriorating investment. Stand aside, and risk allowing one of the most visible participants in the AI spending boom to become a cautionary tale about the economics of the entire industry.
Either way, I don't see much to celebrate from a broader market perspective. A bailout might produce a sharp rally, but I'd be inclined to view it as a temporary interruption in a larger move lower rather than evidence that the underlying problems have been solved. And without a bailout, the deterioration could accelerate.
The irony is that Nvidia may eventually find itself having to finance the survival of the very customers whose spending helped justify its extraordinary valuation in the first place. And if that happens, I suspect investors will start asking some very uncomfortable questions about just how self-sustaining this entire AI boom really is.
3) Famed short seller Jim Chanos also continues to issue warnings about the AI bubble. This X post by user "henrikhinai" has a link to his recent video and a summary of the highlights:
The Netscape Test (0:43):
He compared the decade before Netscape with the one after: U.S. growth was "virtually the same," and corporate profits grew 6% a year in both. His warning: don't extrapolate "much broader impacts" from AIThe Accounting Mismatch (4:43):
Nvidia and the data-center builders book revenue and profit "immediately." The hyperscalers spending those same dollars "are capitalizing those costs." In 1998-2000, S&P operating profits rose 30% in two years – then fell 40%Heroic Assumptions (6:56):
Even with a 10-year life on the chips, "the returns on capital are going to be de minimis." Live deals pencil out at "7%, 6%, 5%, 8%" – "single digit [returns on invested capital] pre-tax"The $2 Trillion Bet (21:21):
On SpaceX's IPO: "the numbers don't work on the existing business," and the launch unit "still loses money." To justify almost $2 trillion, you have to "believe in Mars and the moon and data centers in space"
4) I want to highlight Chanos' bearishness on SpaceX (SPCX). The company's current valuation of nearly $2 trillion is, in part, based on its CoreWeave-like business of selling AI "compute" to others.
I've warned my readers many times about SpaceX's absurd valuation (archive here). And I added it to my "Stinky Seven" list of stocks to avoid on June 12.
SpaceX is down 9% since then, as of writing this morning. Meanwhile, the S&P 500 Index, as measured by the State Street SPDR S&P 500 Fund (SPY), is up 4%.
In the same e-mail, I listed 10 out-of-favor stocks that trade at or near multiyear lows (in some cases, multidecade lows) and generate gobs of free cash flow. Then I expanded this list three days later to form the "Discarded Dozen" and concluded:
I'm confident that this list, on average, will outperform SpaceX and the overall market, as measured by the State Street SPDR S&P 500 Fund (SPY), over the next year.
Four months later, my prediction is playing out well – especially for Adobe, which I'd highlighted in particular:
(Note: SPCX's recent price includes its drop as of writing this morning. All other recent prices are yesterday's close prices.)
Two of the Discarded Dozen, Global Payments (GPN) and ServiceNow (NOW), are open recommendations in our flagship newsletter, Stansberry's Investment Advisory. Only subscribers have access to the full reports and specific buy-up-to advice on these stocks.
When you subscribe, you'll also get immediate access to our full portfolio of recommendations and our archive of past reports. If you're not yet a subscriber, you can become one by clicking here.
Tomorrow, I'll address how investors can avoid big losses on – and even profit from – the bursting of the AI bubble. Stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. I'm safely out of Ukraine, having left Kyiv Tuesday night on the 18-hour overnight train to Warsaw just before the latest barrage of Russian missiles hit.
At one point, a few hours outside of Kyiv, the train stopped and we all had to evacuate as there were Shahed drones in the area. We couldn't see anything, but we heard loud noises that sounded like fireworks from the Ukrainian guns shooting at the drones.
After a very chilly, somewhat nerve-racking 30 minutes, we were allowed to reboard the train and continued on to Warsaw.
Below are photos of me on the train and with two of my new friends who also drove ambulances. In the middle is retired Colonel Terry Virts, a former F-16 pilot and astronaut who spent seven months in the International Space Station – with Russians, ironically enough!
