The following is a warning to all investors in the AI compute space.
Over the past year nearly all equities linked to the AI hardware space have experienced 10x runs or more.
While there is real promise in the AI trade, it is my belief that compute equities will be responsible for the ruin of the largest class of retail investors since the dot com crash.
This is why.
Leveraged ETFs account for less than 1% of AUM out of all ETFs yet they account for 16% of trading volume.
At the same time 0dte options have reached a scale where they drive the performance even of the SP500 in a day to day timeframe.
In short, retail has never been so leveraged.
Another issue is platforms like this one as we’ve transitioned from social media to interest media. Whatever your point of view is, content served will validate it and you’ll get more entrenched.
This, compound to an era of desperation capital where average people believe they need to take outsized YOLO risk to generate capital typically leads to their total ruin.
You’re starting to see this play out even at hedge fund level - see Situational Awareness’s collapse or Jane Street’s $15 billion losses in July.
This class of risk-on investors have grown blind to the outsized exposure they have on the downsize which has led them to wrong asset allocation.
At the same time, AI hardware providers and compute sellers especially are now priced for not only operational perfection, but also all of that outsized growth (that may not happen) is wholly priced into the stocks.
Even if these companies meet all of their projections and accelerate forward, they are barely worth what they are to do as discount rates on DCF valuations would need to be at blue chip level lows, which doesn’t warrant the risk return.
If they don’t, or if there’s any indication they might not, the cascade of liquidations between retail and specific hedge funds will lead to a brutal drawdown that will wipe out many investors. This is not a risk; this will eventually happen, question is when, and that’s the gamble.
Sure, shorts position on these stocks, including mine on SpaceX, might not work, however long positions with no exit targets at all and DCA sells are sure to fail when deploying so much leverage; Situational Awareness’s warning shot was ignored by many, and that will be many’s downfall.
Companies themselves and management know this to be true, and although you won’t find it in their sell side presentation, you will find it in their actions.
Ask yourselves this - if the payback period was 1 year on a data center, or even 2, why not raise all the needed capital on loan at fed rate + 3% and not build out all of the capacity at the same time, if demand is truly infinite.
To be more concrete; ask yourselves this. Why did both Nebius and IREN amongst others issue equity ATM to raise cash if they could make back all of capital on a loan within a year.
Why is NVIDIA not building the data centers itself and selling compute direct if they are selling the chip for 1 year worth of profits and could capture 4-5x the revenue as these companies suggest.
Why are hyperscalers not paying 1-year worth of leases to own the data center instead of paying that supposed capex every year. Power has been disproven as a bottleneck already (see Bloom Energy).
Why did SpaceX acquire Cursor for stock if it was supposed to 2x in the near future and could generate so much on compute, did they want to overpay.
The reality is all of them are at the very least hedging what is a rally that has lost all links to reality, retail isn’t and is levering up, this will be ultimately the downfall of many.
Be smart - derisk.
NFA.