More pain may be coming for the AI trade. Why I’m not giving up on it
You knew it had to happen. The charts foreordained it. I am talking about the collapse in every aspect of the artificial intelligence trade. You could feel it creeping up on the chart of Meta . Then we got the the one thing the market couldn’t bear: a huge prospective capital raise, when we thought the buildout of infrastructure to support Muse was to be self-funded. Hardly. So a gigantic, beautiful move has mostly disappeared. Could the same be coming for Microsoft and Alphabet Wednesday, or Amazon on Thursday? Maybe? Maybe not, but the upside would never trump the downside because the jig was up. Give me Kimberly-Clark or Coca-Cola and most certainly Procter & Gamble . They can now beat the pants off the complex of flimsy disc drives and heavy capital equipment. Did we really care about Lam Research anymore? The danger of Applied Materials can only be outdone by Broadcom or Seagate . I’ve never tried heroin, thank heavens. I had a different addiction: a mind-numbing fealty to the incredible performance of this once-in-a-lifetime group. Why not? The AI had seemingly become smarter than us these last few months, no matter what the field. We all just didn’t know it, but we will. It is taking the place of lots of white-collar people, even as it creates many jobs for the blue-collar folk who are urgently needed to build the data centers. But there’s the first problem: the data centers. Cities and states used to bid for them. Towns with few jobs welcomed them. The first tranche caused concerns in certain locales about despoiled water and increased electricity rates. By the time the data-center builders figured out that they had to pay the cities to keep prices down, that they had to bonus city workers, including teachers, it almost seemed too late, at least for the elections. The demonizing began and never ended. They seemingly became less popular than Immigration and Customs Enforcement. Maybe they survive the elections, maybe they don’t. They have their methodical champion, the great Jensen Huang of Nvidia, and his company’s amazing AI chips, known as graphics processing units (GPUs). Everyone knew they were the best, but only Elon Musk had no reservations buying them, and he’s pledged to exclusively use Nvidia chips. The other hyperscalers wanted them for the clients that insisted to have them, but they all crowed about their own custom chips. I saw something recently about Amazon’s Trainium being superior to Nvidia in certain benchmarks. I don’t believe the claim, but what does that matter? Which brings me to the second arrow in the back of the story: the creation of an ecosystem that would make our country the superior country when it came to generative AI and accelerated computing. We needed to beat China. We need to beat China. Was the government going to do it? Nope, with the exception of a save of the struggling Intel , there would be no government support. It would be up to Nvidia, which embraced the role, bankrolling all sorts of data center aspects including the actual building of the beasts. So Nvidia funded companies, called neoclouds, which would turn around and buy Nvidia product with the money. For some this process was deemed circular. Nvidia offers support via equity stakes and partnerships, then CoreWeave , Nebius and Iren , among others, buy the latest and greatest Nvidia chips — the current generation, Vera Rubin, was preceded by Grace Blackwell, Hopper and Ampere. Instantly sold out as server makers Super Micro Computer , Dell Technologies and HP Enterprise took whatever they could get. So did CoreWeave and the other neoclouds. We knew that Dell, Super Micro and HPE could pay. Not the others. They would take the vendor financing. The skeptic viewed this part of the revolution as a weak link. It never seemed to matter until CoreWeave’s stock began a sickening K2-like fall, with its high-yield debt being the culprit. CoreWeave was a vital client, and even as its Nvidia chips lasted longer than its depreciation , much of the value seemed spoken for. It seemed a little weird that this undercapitalized entity could bring the house down. But without fresh money coming from the prospective initial public offerings of Anthropic and OpenAI to allow those AI labs to keep paying their own bills, people started to worry about CoreWeave’s ability to service its debt. Their deals seem to grow further and further away. In the end it didn’t even matter. Bears, one. Bulls, zero. Now we know AI isn’t going away. Far from it. But with so few to pay for it, because it makes so little money for all but Nvidia, the stock market smells blood and wants the complex robbed of its capital. It’s the first collapse of the railroads. They will be started again, just you wait. But nobody’s waiting. Who wants to be the last one still funding these data center projects, a dastardly term that encompasses a significant share of economic growth and the stock market? Its reach is so vast that you have to go to drug and soap stocks to stay free of it. It’s now like a really bad flu, one that you can immunize yourself from by jettisoning everything that worked for so long. Will it work again? You lose your immunity from criticism if you hang around to find out. Who wants that to happen? We want to try to figure out how to give the group CPR, but the charts say don’t bother. The charts would be wrong, except they aren’t just fueled by the gossamer CoreWeaves. They are fueled by higher rates and higher oil and a fickle president that drives them both up by controlling Congress and the military. Hate him or like him, you have to ask what the heck is he doing. For us, we have tried mightily to trim our exposure to AI, despite taking huge capital gains that must be given away, as per the charitable trust designation we have sworn to. We aren’t a hedge fund — been there, done that — and we have gigantic gains on almost everything left, save Intel and memory-chip giant Micron . Micron is earning huge amounts of money, only be greeted with the sound of bears claiming peak, peak, peak. Maybe I should add that to the soundboard on “Mad Money” ? The stakes are so high. We have to get past the election. We have to get past what the president will or won’t do with Iran. They may be too hard to ride through with a bulge of data center turned into the bilge of data center. We have taken the measure of Federal Reserve Chairman Kevin Warsh, and he knows that the working person’s meager savings in this country must be preserved and he’s going to preserve it for them by fighting inflation. If oil gets cut in half, then he has leeway to hold off on more rate hikes. Maybe the CoreWeaves of the world can raise money. Maybe the orders keep flowing to Nvidia. Throughout this period we have seen one stock continue to rally: Apple . The bears keep piling on about component surveys or supply chain “channel checks,” which have almost always been too negative. The lineup of Apple devices might be the strongest ever, befitting the amazing legacy of a person I so admire: Tim Cook, who passed the CEO torch to John Ternus on Sept. 1. The iPhone Duo may be expensive, but it is the ultimate account opener. And with SpaceX on a rampage to build a wireless network, some phone company — presumably T-Mobile — will eat the margin and crush the other companies and win the battle. Who knows if SpaceX will win the war, but with the amount of spectrum being bought by Musk and his ability to access capital, Starlink will most likely take share from Charter and Comcast first, and then AT & T and Verizon next. If there is a silver lining, it’s the stock of Home Depot since early October. A retailer devoted to housing should be going down, not up. It’s a beacon right now. I’ll take it. I am not doubting the possibility of a bounce this week. Microsoft is more disciplined and shareholder friendly than Meta. Amazon has a hypothetical $50 billion chip business and can offer a roadmap to immense profitability. Alphabet can talk about why it needs so much computing power and how much it can make for it. Any one of these can spark a rally. Any one of these can spark a rally, but I expect those rallies to fade because we aren’t oversold and too many are still in the pool. We’ve done our best to trim and we have sold every parabolic mover, save Apple and Nvidia. We will keep trimming the ones that go higher and circling the wagons to “high grade” the portfolio. Why not abandon everything? Because the revolution is real. We can’t abandon the loom or the railroad or the personal computer. Those revolutions produced winners. But not until they produced losers galore. We like to be with the safety of building power plants, where GE Vernova is involved. We know the semiconductors will always need the materials of Qnity. High-bandwidth memory and CPUs will be in intense demand. But owning Micron and Intel can only hurt before they can help. The valley of the shadow of losses is too deep for most. So we do our best owning some of what made everyone who got in and got out so rich, although that’s a fickle few. And we say, AI is for real, but the profits for all but Nvidia, AMD, Dell and HPE are chimerical and unsustainable if the capital runs out and Open AI and Anthropic don’t come to the rescue. It seems Custer-like right now. Maybe in this version the cavalry gets there on time. But how many will be left? We’ll just have to see. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
