Currently, institutions such as Super Micro Computer Inc., Lumen Technologies, and Symbotic Inc. have been targeted by short-selling organizations. Analysis suggests that, unlike leading AI stocks, the performance of stocks like Super Micro is less stable and susceptible to the impact of short-selling institutions.
The AI craze has driven up related stocks significantly, but obviously not all companies are fearless in the face of challenges. Only after 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 followed the upward trend, including Super Micro Computer Inc. and Lumen Technologies Inc., both of which saw their stock prices rise by over 250% this year.
By the end of last month, Super Micro, Lumen, and Symbotic Inc. had been targeted for shorting and their valuations were questioned by institutions, resulting in a sharp drop in stock prices. Super Micro's market cap was around $36 billion at the beginning of last week, but dropped to about $26 billion by the end of the week due to a report released on Tuesday by the well-known short-selling institution, Hindenburg Research, which pointed out "obvious accounting issues" and other problems, triggering a corporate governance crisis.
"We are differentiating between winners and losers," said Ken Mahoney, CEO of Mahoney Asset Management.
Analysts believe that the reaction to Nvidia's earnings report last week demonstrates how volatile the situation can become. Although the chip manufacturing giant exceeded analysts' expectations, its stock price fell by 6.4%. Some analysts believe the reason is that since early 2023, Nvidia's stock price has risen by over 700%, and investors have become accustomed to Nvidia not only exceeding expectations, but thoroughly surpassing them. In a scenario where the stock price is "priced perfectly", Mahoney stated that this $3 trillion company is ready for a sell-off of up to $200 billion in size.
However, Mahoney pointed out that Nvidia and other large AI companies among the "Big Seven" in the US stock market have consistently performed well in terms of performance and growth. That is why they are different from companies like Super Micro, whose performance has been "unstable," he said.
Being inconsistent in performance makes one a target for short-sellers.
Analysts believe that this instability, combined with the rapid rise in stock prices, makes such stocks especially vulnerable to short seller accusations. About 24 hours after the release of Larkenburg's report, Super Micro Computer responded that it needed more time to evaluate the internal controls of the financial report.
Tuesday was also a difficult day for Lumen Technologies as Kerrisale Capital announced on social media platform X that it was shorting the stock, citing 'deteriorating sales and profit margin trends, as well as a huge debt burden.' The stock of this fiber optic network company rose rapidly in July, from about $1 to over $6.50, but plummeted after the news broke and is currently trading at about $5.
Meanwhile, Symbotic, supported by SoftBank Group, saw its market cap 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 activity. The warehouse robotics company positions itself as a beneficiary of AI and reached a joint venture investment agreement with SoftBank in July last year, when its stock price was more than double the Friday closing price.
Larkenburg didn't just focus on Super Micro Computer. The institution has struck again 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 plunged 53%, while the company stated in a statement that it believed the report contained misleading statements.
The digestion period is underway.
However, looking back in history, such dramatic fluctuations always occur when the market is fascinated by new technologies, from the invention of radio to the development of the internet. At present, the benefits of artificial intelligence are still being explored. Valuations of AI startups have soared, and this situation has spread to the stock market, creating a frenzy of AI concept stocks.
"The stock 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." - John Belton, Portfolio Manager at Gabelli Funds
This is not the first time that investors have expressed bearish views on companies whose stock prices have soared due to AI expectations. In March, Lumen Technologies shorted datacenter owner Equinix Inc., and in July, Culper Research questioned the AI vision of bitcoin miner Iris Energy.
From this perspective, the retracement of some AI concept stocks and the questioning of the valuation 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 how large-scale this will be, and this market backdrop could lead to some small-scale oversupply," Belton said. "We are still in a phase of the generative AI investment cycle, and it is difficult to determine the shape of the long-term cycle in this phase."