SpaceX trades below its IPO price – and underperforms my 'Discarded Dozen'; PayPal soars on buyout offer; IBM crashes on profit warning due to AI; Bad news at OpenAI
1) As I predicted many times (archive here), the most overvalued large-cap stock of all time, SpaceX (SPCX), has continued to tumble...
Yesterday, it hit a new all-time low and, for the first time, traded below its $135 IPO price.
Don't even think about bottom-fishing this one, as it still trades at 92 times trailing revenues. That means it's still nearly 10 times overvalued, given that I think a generous multiple for the stock would be 10 times revenues.
As a response to this extreme overvaluation, in my June 12 and June 15 e-mails, I named 12 beaten-down stocks I called the "Discarded Dozen" and wrote:
I'm confident that this list, on average, will outperform SpaceX (SPCX) and the overall market, as measured by the State Street SPDR S&P 500 Fund (SPY), over the next year.
It has only been a little more than a month since then, so it's far too early to declare victory. But my prediction is looking exceptionally good so far...
On average, the Discarded Dozen are 3 percentage points ahead of SPY and 21 ahead of SPCX:
I have no doubt that the gap between my list and SpaceX will continue to grow wider...
2) Three of my Discarded Dozen picks are up double digits – led by PayPal (PYPL), which soared 17.2% yesterday to close at $55.52.
This jump came after the company received a buyout offer of $53 billion, equal to $60.50 per share, from privately held payment processor Stripe and one of the world's largest private-equity firms, Advent International.
As this Wall Street Journal article details, there's no guarantee PayPal will be receptive to the offer as it's in the early stages of a turnaround under new CEO Enrique Lores:
Lores, the former HP CEO, took the reins in March after PayPal issued a profit warning. The company blamed the poor outlook on sputtering growth from its key branded-checkout product, which lets customers use PayPal when making online purchases, and poor internal execution.
Lores has since announced plans to reorganize the operations into three businesses to boost growth. The new segments are: Checkout Solutions & PayPal; Consumer Financial Services & Venmo; and Payment Services & Crypto.
PayPal management has said it plans to reduce costs by at least $1.5 billion over the next two to three years. The Wall Street Journal reported in May that the company planned to cut 20% of its staff over that time frame.
Lores has said he thinks PayPal has underinvested in its technology platform and is falling behind other financial-services companies. He wants to cut down on what he sees as unnecessary layers of the business to spend more on AI and become a technology leader.
I think Stripe and Advent would be stealing PayPal at $60.50 per share, so I think they'll likely raise their bid, and other bidders may emerge.
My friend Chris Irons (aka Quoth the Raven on Substack) thinks that Amazon (AMZN) could be interested:
Amazon has extraordinary strengths across commerce, logistics, cloud computing and AI, but it still lacks a truly global payments ecosystem comparable to PayPal and Venmo. Buying PayPal would instantly give Amazon hundreds of millions of consumer accounts, an enormous merchant network, a mature payments infrastructure, and a financial layer that could be integrated throughout Prime and its broader ecosystem.
Financially, Amazon can easily afford a transaction of this size. Strategically, the fit remains compelling. And unlike another major payments processor attempting to acquire PayPal, Amazon arguably faces a different competitive landscape from an antitrust perspective because it isn't already a dominant player in payment processing.
About PayPal's business, he concludes:
I think the market has finally recognized much of what I've been arguing for months: PayPal was never the broken business its valuation implied. It was a profitable, cash-generating franchise trading at a distressed multiple. The PayPal value story may not officially be over just yet, but it's entering its final chapter.
In this X post, fintech podcaster Simon Taylor writes, "This is the biggest story in payments I can remember, and I write about payments for a living." And he details how the combined company would touch "$3.7 trillion in annual payment volume" if the buyout offer closes.
3) IBM (IBM) crashed 25.2% on Tuesday – its largest one-day drop ever. And after issuing a profit warning, it dropped another 2.7% yesterday to hit a 52-week low.
As the WSJ reports, AI has a big hand in the company's struggles:
The selloff in software stocks like Adobe and Salesforce earlier this year was triggered by fears that AI companies like Anthropic would enable people to easily make cheaper copies of the software-as-a-service products sold by traditional firms. However, the selloff in IBM's shares, which wiped out $69 billion in market capitalization, is being driven by a different phenomenon: worries that new AI purchases will crowd out more traditional tech spending in company budgets.
The rapid rise of AI has made chips more expensive, which in turn has driven up prices for everything from laptops and gaming consoles to AI data-center servers. That run-up in costs has squeezed tech budgets at big institutions including banks – a core customer base for IBM – that buy an enormous amount of computing power from cloud companies to run in-house AI tools.
IBM Chief Executive Arvind Krishna said that in June, clients shifted their quarterly capital expenditures toward servers, storage and memory to secure supply-constrained infrastructure ahead of anticipated price increases.
I've long warned my readers away from IBM (archive here) – starting more than 24 years ago, in fact. On February 20, 2002, I published this article on the Motley Fool website: IBM's Accounting Tricks.
Since then, the stock has barely doubled. It's up 113%, while the S&P 500 Index is up 583%, as you can see in this chart:
I'm still not interested in the stock, but the real question is what the implications are for the broader AI sector. As this WSJ article notes:
That big companies are going bananas for AI is no surprise, of course. But IBM's warning also suggested that their AI spending is stretching those customers so thin that they're having to pull back elsewhere.
It's possible that will prove temporary. Many companies for instance believe they need to secure supplies of memory that's in short supply before prices go up further. But it may also indicate that corporate America is starting to run out of runway for AI spending – and that companies are going to have to make more sacrifices down the road to keep the splurge going. That would be a concern for investors far beyond just IBM shareholders.
Chris Irons agrees, asking, "Did the AI bubble just burst?" He concludes:
IBM has now introduced a less comfortable set of facts. Corporate technology budgets are finite. Scarcity changes customer behavior. Hardware spending can crowd out software spending. Large deals can slip. Management can misjudge the magnitude of those shifts until the quarter is already over.
Perhaps this is nothing more than an IBM specific execution issue. Perhaps it is the first company willing to publicly acknowledge a broader budget squeeze that others have not yet admitted.
Either way, this feels like one of those moments where it probably makes sense to sit up in your chair, stop mainlining Tom Lee soundbites and whatever AI or Ethereum hype segment CNBC happens to be running that afternoon, and spend a little more time listening to what companies are actually telling you about their customers.
You do not have to become bearish overnight. But taking one hand off the buy button long enough to locate the nearest exit does not make you a doomer. It just means you're paying attention.
4) I view IBM's profit warning as yet another blow to OpenAI – which I think will not only fail to ever go public, but could implode. That's what cash-incinerating companies with dreadful business models that are losing share tend to do...
Think about it: If OpenAI ceased to exist, would anyone care? Users of ChatGPT would simply switch to another large-language model like Anthropic's Claude or Alphabet's (GOOGL) Google Gemini.
In this recent interview with Ed Elson of Prof G Markets, author Sebastian Mallaby discusses "why he believes there's a real chance OpenAI runs out of money within the next 18 months, and what that would mean for the broader AI industry."
In another piece of bad news, this X post by Aakash Gupta details the lawsuit Apple (AAPL) just filed against OpenAI.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. Yesterday, Susan and I did an 11-mile hike in the beautiful Scottish Highlands. Here are some pictures:
