AI Bubble Loses Some Air…

We are in an AI bubble. It could keep going for a while or we may have hit the pinnacle. I’m not sure when it ends but taking positions down into strength makes sense to me.

In a sign of a potential blow off top, semiconductors are leaping one at a time. This past week it was Advanced Micro Devices (AMD) that shined the brightest but they are not alone. The group has been literally en fuego and, as long as the massive AI spending continues, it likely continues.

Of course, it will eventually end. When that happens is the $10,000 question but bubbles always burst. For now, buckle up and enjoy the ride, right?

My pick in the semi space is Aeluma (ALMU). I’ve written a lot about them lately but, if you still don’t know what they do, this is an excellent thread on the company; if you’re not fully understanding what makes them different, and very special, spend a few minutes checking it out.

Aeluma stock is up a lot this year, but remains very cheap when looking at the total opportunity in front of them. I’m convinced they will get a commercial contract soon (which means in the next 3-6 months, not necessarily next week), which will be the first domino to fall. When that happens, if you’re not in the stock already, it will be a big game of catch-up.

Meanwhile, if you want to understand how to know you’re in a bubble, check out the latest post from Kuppy’s Korner. I’ve copied some of the first few paragraphs below as a teaser…

Last month, I chose to strip away all the hubris around AI and ask one simple question, one that oddly no one had really bothered to ask; how much revenue is needed to justify the current level of capex spend and give AI investors a return on their capital??

I clearly hit a nerve in the industry, when judging by the number of individuals who reached out to chat. Since then, I’ve spoken with people who own datacenters, lend to datacenters, and design datacenters. I’ve spoken with people who are working to improve the cooling technology, or the customer interface. I’ve spoken with hedge fund, PE and VC investors who are fixated on the future of AI, and I’ve spoken with employees who are desperate for a liquidity event before it all collapses. In total, I’ve spoken with over two-dozen rather senior people in the datacenter universe, and there was an interesting and overriding theme to our conversations; no one understands how the financial math is supposed to work. They are as baffled as I am, and they do this for a living.

This is one of those rather surreal situations where everyone senior in this ecosystem knows that the math doesn’t work, but they don’t know that everyone else also knows this. They thought that they were the foolish ones, who simply didn’t get it.

The above was all written on Thursday afternoon as I have four college buddies in town for the long weekend. I was hopeful for a quiet market on Friday. That obviously didn’t come to pass and now, with markets taking it on the chin, one has to wonder if the bubble has been burst?

All the signs are here for an imminent correction in the market. We are certainly closer to the end of the bull market than the beginning. It’s late innings in this run so buying the dip aggressively is not my recommended strategy. However, now is likely not the time to panic either.

The valuations are high but the fundamentals are strong. As I wrote last week, unlike the dot.com bubble, there are strong cash flows to support the AI investments taking place. The race to dominate the digital future is still on! However, yesterday’s winners are likely tomorrow’s laggards and it’s a good time to look beyond the (incredibly expensive) mag-seven for names to put in the portfolio.

Small-cap biotech continues to be a place where there’s excellent opportunity. The market seems to turn its focus to different companies and getting in front of catalysts is paying off right now.

Last week, Anixa (ANIX) became the latest example of a stock where the path of least resistance was higher. Was the news of the final patient visit in their vaccine trial a big deal? Not really, but it sparked a 50% move in the stock. It’s easier for these laggards to go up than down in this environment.

Similarly, with no news at all, Femasys (FEMY) more than doubled in two days last week. It’s that kind of market right now.

Which one is next? I continue to think Kazia (KZIA) is poised for a big move. They are meant to be reporting data from their open label phase 1b trial in TNBC very soon and the current valuation is…well, let’s just say it’s trading below the value of a public shell company. The downside here is quite limited, IMO.

I hope everyone enjoys the three-day weekend. I’m signing off here to host my college friends. Happy Columbus Day y’all!!!