AI "Big Boss" NVIDIA is now in decline, with second-tier concept stocks such as AMD being heavily shorted

The AI frenzy has driven related stocks to soar significantly, but obviously, not all companies are made of gold, and only when the tide recedes do we know who is swimming naked.

According to media reports, some investment institutions have started shorting some AI concept stocks that have been following the trend, including Super Micro Computer Inc. and Lumen Technologies Inc., whose prices have surged by over 250% this year.

By the end of last month, companies like Super Micro, Lumen, and Symbotic Inc. faced short selling as institutions questioned their valuations, leading to a sharp drop in stock prices. Super Micro's market value was around $36 billion at the beginning of last week, but fell to around $26 billion by the end of the week due to a report released by prominent short-selling firm Hindenburg Research on Tuesday pointing out "obvious accounting issues" and other problems, triggering a corporate governance crisis.

"We are now distinguishing between winners and losers," said Ken Mahoney, CEO of Mahoney Asset Management.

Analysts believe that the reaction to Nvidia's financial report last week shows how unstable the situation could become. Although the chip manufacturing giant exceeded analysts' expectations, its stock price fell by 6.4%. Some analysts attribute this to Nvidia's stock price having risen by over 700% since early 2023, with investors accustomed to Nvidia not just meeting expectations but completely surpassing them. With the company's stock price "perfectly priced," Mahoney stated that the $3 trillion company is prepared for a $200 billion sell-off.

However, Mahoney pointed out that Nvidia and other large AI companies in the "Big Seven" of US stocks have consistently performed well in terms of performance and growth. This is why they are different from companies like Super Micro, whose performance has been "unstable," he said.

Unstable Performance Draws Short Sellers' Attention

Analysts believe that this instability, coupled with rapid stock price increases, makes such stocks particularly vulnerable to accusations from short sellers. About 24 hours after Hindenburg's report was released, Super Micro Computer responded that more time was needed to evaluate the internal controls of the financial reports.

Tuesday was also a tough day for Lumen Technologies, as Kerrisale Capital announced on social media platform X that they were shorting the stock, citing reasons such as "deteriorating sales and profit margins, as well as a huge debt burden." The stock of this fiber optic network company surged in July from around $1 to over $6.50, but plummeted after the news, currently trading at around $5.

Meanwhile, Symbotic, backed by SoftBank Group, saw its market value shrink by 23% in less than two weeks as a short report claimed that drone footage showed some of the company's locations had no operational activities. This warehouse robotics company positioned itself as a beneficiary of AI and reached a joint venture investment agreement with SoftBank in July last year to purchase its AI-driven systems, when its stock price was more than double the closing price on Friday However, Xingdengbao's focus is not only on Super Micro Computer. The institution once again challenged last week, releasing a report accusing iLearningEngines Holdings Inc., a company that claims to be an "AI platform for learning and work automation," of falsifying its financial data. The stock price plummeted by 53%, while the company stated in a declaration that it believed the report contained misleading statements.

Digestive Period in Progress

Historically, when the market is fascinated by new technologies, such drastic fluctuations occur, from the invention of radio to the development of the internet. Currently, the benefits of artificial intelligence are still being explored. The valuations of AI startups have soared, and this situation has spread to the stock market, leading to a frenzy of AI concept stocks.

John Belton, portfolio manager at Gabelli Funds, previously stated,

"The market always goes too far too fast and then goes through a digestion period. For many companies, we are going through a healthy digestion period."

This is not the first time investors have been bearish on companies whose stock prices have soared due to AI expectations. In March, Xingdengbao shorted data center owner Equinix Inc., and in July, Culper Research questioned the AI vision of bitcoin miner Iris Energy.

Analysts believe that from this perspective, the decline of some AI concept stocks and the questioning of the valuations of companies related to this technology indicate that investors are starting to consider how much value all of this will ultimately have and which companies will have long-term development.

"We don't know the scale of this, and this market backdrop could lead to some small-scale excess," Belton said. "We are still in a phase of generative AI investment cycle, and it is difficult to know the shape of the long-term cycle in this phase."