It’s pretty hard to know what to believe when it comes to this ongoing AI revolution. The AI bubble calls have been growing louder for well over a year now. And while some folks, including the great Michael Burry of The Big Short fame, might feel as though we’re in the lead-up to the peak of the dot-com bubble days, the reality of the situation is that it’s really hard to tell where exactly we are in the boom as the mega-cap tech titans ramp up the CapEx, which demonstrates that the risk of missing out might top the risk of losing big money on endeavors that may never pay off, at least to the magnitude that Wall Street expects.
Any way you look at it, there are major AI bulls out there who think that the revolution is in its earlier innings (maybe the second or third inning, depending on who you ask), while others, including Dr. Michael Burry, think that a correction could hit at some point over the medium term.
Given Burry’s bearish put options, perhaps that big correction (or maybe something a bit more substantial) in AI stocks — especially semiconductor names that are still going parabolic — might hit by the year’s end. Only time will tell if the AI revolution is underestimated or overestimated. For most, I think it’s best to have a balanced approach as one seeks to hang on for the ride.
AI CapEx surge: Colossal waste or money well spent? We’ll find out in due time
Up ahead, mega-cap tech is going to do its best to show that the CapEx on AI is money well spent. Some of the early signs have already made their way into the results. The big question is whether it’s just the start of something with a parabolic curve or if it’s just some low-hanging fruit. Either way, it looks like there’s going to be no slowing the AI race as firms look to tackle energy and hard asset bottlenecks.
In my view, the AI trade might have bubbly parts and pockets of deep value. For the semis, which have gone parabolic, a 50% drop certainly wouldn’t be out of the ordinary. Believe it or not, such a crash would put the iShares Semiconductor ETF (NASDAQ:SOXX | SOXX Price Prediction) right back to where it was around nine months ago.
That said, in a prior piece, I highlighted a potential token explosion we could be in for as new AI products come online in the coming months, which could more than justify the unprecedented pop in the names.
At the same time, some of the Mag Seven names, especially the ones that were left behind in the latest market ascent, might be the most misunderstood names of all, even for the skeptics of the AI revolution. Add the software companies pivoting to become more AI-native-esque into the equation, and I’d argue there’s no shortage of opportunities in a market that’s shifted to the hardware side so aggressively.
The Mag Seven look cheap, maybe because they are cheap
Between the semi names, the CapEx spenders in the Mag Seven, and the freshly-plunged software names, which still have more than a puncher’s chance to win in AI, at least in my opinion, I’d be more inclined to go with the latter two. Is it getting harder to follow Dr. Burry’s lead?
No doubt. But with Meta Platforms (NASDAQ:META) with a forward price-to-earnings (P/E) in the high-teens, I’d say it’s hard not to be bullish, especially considering all the AI ambition you’re pretty much getting on the house or, at the very least, for a colossal discount.
For investors willing to pay a little bit more for a more certain agentic setup, Microsoft (NASDAQ:MSFT), which Burry actually bought recently, might be worth picking up if you’re on the fence about whether AI is overheated or underheated (maybe it’s both?).
The enterprise behemoth goes for a little over 21.0 times forward P/E. Like Meta, that’s on the cheap end of the historical range. If Microsoft stock is good enough for an AI bear, like Burry, it ought to be good enough for everyone else, in my humble opinion.
Meta and Microsoft need to prove themselves as CapEx stays high. And I have a feeling that once they do, investors might suddenly be more willing to pay a P/E multiple in the 30s. Time will tell, but I think betting on Zuckerberg and Nadella while it’s cheap to do so might be the smart, albeit somewhat obvious, move.
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