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As I read the back and forth on AI, over and over again I keep thinking the same thing: If you substitute the word “Internet” for “AI,” it’s the same as 1999/early 2000.
AI, like the Internet, is a revolutionary, world-changing technology that some early adopters and companies are using to massively benefit.
But as the Internet bubble inflated, the spend far outpaced the demand, resulting in circular financing, terrible companies achieving absurd valuations, etc. – a classic bubble that burst, taking the great companies down 80%… and the lousy companies to ZERO.
There’s little doubt in my mind that we’re in a similar AI bubble right now – but I’m much less certain how much further it will inflate and when exactly it will burst.
Are we in early 1999, when Internet stocks doubled over the next year before crashing? Or are we in early 2000, on the edge of the precipice?
In today’s essay, I’ll explain exactly where I think we are in the market… why I’m not rushing to sell my stocks yet… and where I see tremendous value today…
CNBC’s Jim Cramer recently visited a construction site in Idaho for a Micron Technology (MU) semiconductor plant. He complained that “there’s an incredibly jarring gulf between stock prices and reality” and that “Micron’s stock is radically undervalued.”
This is significant because, for decades, Cramer has been a great contra-indicator.
It reminds me of his infamous “Winners of the New World” speech on February 29, 2000, just 10 days before the Nasdaq Composite Index peaked. In it, he named 10 Internet-related stocks and said:
We try to own every one of them. Every single one. And if I had my druthers, I wouldn’t own any other stocks in the year 2000. Because these are the only ones worth owning right now in this extremely difficult, extremely narrow stock market. They are the only ones that are going higher consistently in good days and bad. I love every one of them, just as I loathe the rest of the stock universe.
Within 15 months of his speech, the basket of stocks lost more than 80% of its value. By 2009, all 10 companies were either bankrupt, delisted, or acquired for a tiny fraction of their peak bubble valuations.
I think history is likely to repeat itself with the AI bubble…
And make no mistake, we are living through a bubble. Consider that outside of drugmaker Moderna (MRNA) and oil company Marathon Petroleum (MPC), the best-performing stocks in the S&P 500 Index through the end of August are all beneficiaries of the AI-infrastructure boom:
| Rank | Company | Ticker | Total Return |
| 1 | Sandisk | SNDK | 469% |
| 2 | Moderna | MRNA | 355% |
| 3 | Dell Technologies | DELL | 260% |
| 4 | Micron Technology | MU | 204% |
| 5 | Seagate Technology | STX | 189% |
| 6 | Western Digital | WDC | 140% |
| 7 | Marvell Technology | MRVL | 137% |
| 8 | Lumentum | LITE | 137% |
| 9 | Marathon Petroleum | MPC | 129% |
| 10 | Intel | INTC | 127% |
I looked at what the same list looked like in the last stage of the Internet bubble. Sure enough, they were all tech stocks – Qualcomm (QCOM), Oracle (ORCL), Adobe (ADBE), and Apple (AAPL) among them – reflecting the Internet craze at the time.
Things Are Getting Worse for OpenAI
I’ve been warning my readers about ChatGPT operator OpenAI for years, calling it “a cash-burning furnace.” And things continue to go from bad to worse for the company…
As reported in the Wall Street Journal, its second-quarter revenue was up only 18% from the first quarter. Meanwhile, revenue more than doubled for rival Anthropic.
At the beginning of this year, OpenAI had twice as much annual recurring revenue as Anthropic. But it has now fallen far behind, as this chart from TMT Breakout shows:
And the cash-flow trends are even more starkly divergent, as you can see in this chart created by my friend James Emanuel:
These trends are why I think Anthropic will have a successful initial public offering, perhaps as soon as October. Meanwhile, I doubt OpenAI will ever go public. It’s more likely to implode spectacularly.
If I’m right, the consequences will go far beyond one company, as blogger Ed Zitron writes here: What Happens If OpenAI Dies? He summarizes why he’s so bearish on the company:
OpenAI has no economies of scale, it’s horribly-unprofitable, and does not have a stable business. This naturally means that it has to continually raise capital, except raising further capital is going to be difficult, based on the sheer amounts it needs, the dwindling funds available for it to raise, its already-inflated valuation, and the fact that it’s way behind a competitor facing exactly the same problems.
OpenAI has promised the impossible, and built a company that only makes sense if you’re willing to ignore the worst economics in the history of capitalism. Its future is dependent on raising over a hundred billion dollars a year in one of the worst funding climates in history. Its revenues are slowing, its competitor (and there’s really only one) has outpaced it (all while slowing itself), and its CEO is one of the single-worst spokespeople in history…
The collapse of OpenAI would likely be a result of the walls closing in around its ruinous obligations and economics, with counterparties left short-changed and deals broken as things begin to unravel.
How might the unraveling play out? Zitron outlines a number of scenarios, but I think this is the most likely one:
While I imagine some rescue package is pulled together, OpenAI could simply be allowed to run out of money, short-changing nearly a trillion dollars’ worth of compute contracts, killing CoreWeave, Cerebras, and anyone else reliant on its income. Its customers would be given API keys that flow to Microsoft AI Foundry, Amazon Bedrock and Google Vertex, and be told that there would be little or no further development or training of OpenAI’s models.
This situation, while obviously destructive for the entire industry, would give everybody a scapegoat. Who made all the promises? Sam Altman. Who ran a shitty company into the ground? Sam Altman. Who misled everyone into believing that there’d be infinite demand for compute? Sam Altman. Stories will leak that OpenAI was “not consistently candid” with its financial condition with partners, allowing everybody to reframe a trillion-plus dollars in waste as the result of one egregious con artist.
If Zitron and I are right that OpenAI is going to be a train wreck, the first stock to go to zero will likely be data-center builder CoreWeave (CRWV).
The No. 1 Victim of an AI Bust
Let’s take a look at CoreWeave’s historical financials, which are quite limited because it’s less than 10 years old. (It was originally called Atlantic Crypto Corporation – talk about a red flag! – and changed its name to CoreWeave in December 2019.)
Revenue growth has been strong, but the company barely breaks even on an operating-profit basis. And it has had negative net income every quarter thanks to high, rising debt payments:
Analysts don’t expect the company to turn profitable anytime soon. Consensus earnings estimates are negative $5.20 per share this year, narrowing slightly to negative $4.24 next year.
CoreWeave has generated a bit of operating cash flow, but this is far exceeded by its capital expenditures (“capex”). As a result, free cash flow (“FCF”) is accelerating to the downside:
CoreWeave funds its huge cash burn by borrowing more and more money, resulting in rapidly rising net debt:
These are among the ugliest financials I’ve ever seen…
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.
Why I’m Staying in the Market
But I’m not urging my readers to sell. For one thing, earnings growth for companies in the S&P 500 has been off the charts this year.
In a post on his Week in Charts blog, Charlie Bilello of Creative Planning, notes that as of August 18, second-quarter earnings growth of 29% was “the biggest upside surprise in history.” And it has risen to more than 50% year over year – the highest quarterly growth rate in five years.
As a result, Bilello notes…
S&P 500 earnings are now expected to surge 32% in 2026, more than double the 15% growth expected at the start of the year.
In this chart, you can see how growth has been climbing steadily for the past three years:
This growth is largely driven by the AI infrastructure bubble.
Earnings of tech companies in the S&P 500 soared 71% year over year in the second quarter. That’s all the more remarkable considering just one year ago, these companies saw less than one-third of that growth, as this chart from Ritholtz Wealth Management shows:
Given that the S&P 500 is “only” up around 12% this year – far less than earnings growth – simple math dictates that the index’s price-to-earnings multiple has gone down this year.
That means stocks are cheaper and therefore a better buy today than they were at the beginning of the year, right?
Not so fast…
Five of the six periods of extremely high earnings growth in the past quarter century – all but last year – have preceded significant market drops.
My friend Doug Kass of Seabreeze Partners Management agrees that strong earnings per share (“EPS”) doesn’t equate to strong price gains. He argues that this year offers a combination of unique market challenges compared with prior periods. From one of his recent pieces, he cites:
- High and rising inflation and interest rates.
- A burgeoning deficit and U.S. debt load may be a permanent condition giving the general lack of discipline from both parties in Washington DC.
- Improvisational geopolitical and fiscal policies that present threats to political and economic stability.
- Both parties are moving to extremes – the Republican party more to the right and the Democratic party to the left. With a possible Democratic congressional majority win in November, anti-corporate policy (higher corporate taxes, etc.) may be in the offing.
- Traditional valuation metrics in the 98th percentile, two standard deviations above the average.
- The AI capital spending spree and gains from investments have inflated S&P profit reports… an earnings reckoning may lie in the not too distant future.
I think Doug is right that huge corporate earnings growth likely won’t translate into a comparable huge rise in stocks.
Unlike Doug, I’m not bearish on stocks in general – with the exception of the AI bubble. When it bursts, stocks that have soared during this boom – such as CoreWeave (CRWV) – will undoubtedly crash.
But plenty of stocks are likely to hold up well. While investors are fawning over red-hot AI stocks like Sandisk (SNDK), Dell (DELL), and Micron (MU), they’re completely ignoring a corner of the market where I’ve grown extremely bullish in recent months.
I recently sat down on camera to discuss a major shift I see coming to the market for the first time in nearly 30 years – the same opportunity that helped me make my name on Wall Street back in 1999.
In my video, I discuss why I see market leadership shifting from the hottest AI names in the market to a different class of stocks. And I share everything I can to help you position your money while there’s still time to take advantage of this shift.
