Over the past few weeks, shares in AI infrastructure companies have dropped as a result of a significant sell-off. According to Morgan Stanley, companies involved in AI infrastructure experienced an average drop of 7% in share prices over the last month, up to July 24.
As the market pulled back on AI stock prices, the receding tide exposed some vulnerabilities within AI investing circles. High-profile AI hedge fund Situational Awareness was forced to sell its entire book of public investments to rival fund Citadel after leveraged bets on AI companies, like South Korean semiconductor company SK Hynix, didn’t pan out. The two-year-old hedge fund peaked at $45 billion earlier this month, but sold its shares for $10 billion in a deal that closed on the morning of July 30.
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Situational Awareness is led by 25-year-old Leopold Aschenbrenner, a former OpenAI researcher nicknamed the “Nostradamus of A.I.” — in fairness, the original Nostradamus also got a fair few predictions wrong.
CNBC’s Jim Cramer, host of Mad Money, made a few prophecies of his own as other areas of the market saw gains in the wake of AI’s decline.
“Now, you can call it a broadening, or you can call it a fleeing,” he said on Mad Money.
Understanding the AI infrastructure stock drop
Though the Situational Awareness situation and the larger drop in AI infrastructure share prices seem to spell trouble for the industry, the market’s recent turmoil isn’t necessarily an indictment of the industry itself.
Hamiz Awan, a managing partner and co-founder of tech investment firm Plutus21, says any crowded investment that involves a significant amount of leveraging, the practice of borrowing money to buy an investment, will almost always end in a large reversal.
“These are probably the most crowded trades on Earth right now, and they are also probably the most levered trades on Earth — so, they were naturally going to move in the opposite direction, and move very aggressively,” Awan told Moneywise. “When you’re that levered-up, you’re just so sensitive to small moves that it just starts this cascading effect where something unrelated can still very much squeeze you out of your position.”
Cramer points to the shortages in memory and storage that acted as an industry bottleneck, granting pricing power to companies like Seagate, Western Digital, SanDisk, and Micron.
“These companies historically have been very boom and very bust,” Cramer says, the bust occurring as investors determine the memory shortage, and the resulting elevated share prices, is temporary. “So, the data center stocks, once so prized, now seem dicey.”
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How should retail investors react?
There’s no shortage of investing advice being circulated as a result of the AI stock pullback.
Cramer highlights other areas of the market that “are in the sunshine,” such as software companies like ServiceNow and Salesforce, which have jumped 10.87% and 15.35%, respectively, over the past month. He also mentions Walmart and Costco, whose shares have shot up in the past week.
Though the AI pullback hurt Nvidia and Intel’s stock prices, Cramer also remains bullish on these companies because, “their gains weren’t from shortages,” he says.
Similarly, Stephen Byrd, Morgan Stanley’s Global Head of Thematic and Sustainability Research, said in a blog post: “Since we are fundamentally bullish on the rate of improvement in AI capabilities, the benefits of AI adoption and associated capex — and given the recent market pullback affecting a range of AI Infrastructure stocks — this point in time represents an unusually attractive buying opportunity.”
Morgan Stanley stopped short of recommending specific stock picks, instead indicating areas that may see growth, like companies that alleviate bottlenecks in the AI industry, computing manufacturing, leading Chinese AI companies, energy supply and storage companies, and large tech companies that can scale AI adoption.
Through the myriad of opinions on how retail investors should approach the turbulent AI infrastructure stock market, Awan cautions against retail investors abandoning their investment strategies in an attempt to capture momentum.
“I, at least personally, have not seen a consistent track record of somebody timing perfect momentum trades,” Awan says. “So it’s hard for me to believe that retail investors, or even sophisticated hedge fund investors, can do that consistently over time.”
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This article originally appeared on Moneywise.com under the title: Jim Cramer says Wall Street is ‘fleeing’ AI stocks after a 7% drop — and buying Salesforce, Walmart instead
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