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I'd like to start by sharing a good summary by Howard Marks:
*The stock market is like an auction house. The highest bidder is the one willing to accept the least for their money. When the price gets bid up, the yield gets bid down. The market is currently participating in a bidding war for certain equities and volunteering their money for low returns, weak structures and high risk.*
The market as it seems apparent to me is back entirely in risk-off mode with the allure of unprecedented returns with any stock or sector related to data centers. People seem to be feeling like it's the norm for daily mid to high single digit and monthly double digit gains as sustainable. I'm seeing these posts everywhere:
"*How to find next MU, SNDK, NVDA, INTC , STX*"
"*How much higher Sandisk can reach?*"
"*MU and SNDK - What Now*"
"*I bought MU yesterday and wish I bought more.*"
"*Market is pricing MU wrong, Memory is not cyclical anymore*"
"*AMD’s stock soars as data center revenue jumps 57%*"
To me, it’s getting dangerous with how bid up all the AI stocks are becoming and the concentration in the S&P is a red flag. The outperformance of individual equities within the last 3 years in the S&P and what’s causing the recent bull run are basically all strictly related to data centers. I think Buffet's recent statement that the markets are currently in a state of casino-like gambling comes at a good time.
To clarify, when you are willing to pay 35-80x multiples for a company with or relating to:
* No earnings visibility beyond the next 12-18 months
* Recent 50-100%+ YoY earnings jumps
* 500-1500% increase in market cap over the last 12-24 months
* Hinging on 2T in RPO’s with over half from OpenAI and Anthropic (which are still unprofitable)
* No sustainable and profitable revenue from the sources of the capital expenditure that can’t even cover a years worth of depreciation
* A network and web of circular financing
**This is not investing, this is speculative gambling.**
The majority of outperformance in the S&P the last 3 years are in a small portion of the sectors, primarily:
**Semiconductors**
**Semiconductor Equipment & Materials**
**Computer Hardware**
**Industrials (Primarily: Engineering & Construction, Electrical Equipment & Parts, Specialty Industrial Machinery)**
Most if not all the data center equities that have rallied significantly in these sectors are at nosebleed valuations or euphoria that's priced so egregiously that it's expected this data center capital expenditure cycle will continue for the next 5+ years growing at these rates.
I would caution anyone reading to please not FOMO and avoid chasing the high in these sectors. This stuff ***will*** have a parabolic move downwards. Capital inflows of 700B+ annually into data centers cannot continue indefinitely and OpenAI / Anthropic are on a short rope. It could just take one earnings miss by NVDA, an S-1 by OpenAI or Anthropic, one random announcement or article to bring this house of cards all down.
**Everyone is scouring any corner of the market now looking for anything data center or AI. Look where people don't care to look right now.**
This is where long term wealth creation is. This is where the margin of safety is. Buying and holding these names long term at 40-80x earnings is a fool's errand at best, or a bad bet at worst. Sure, short term, there may be more upswings depending on how egregious the bidding gets. But if you're buying these names short term, again, you're gambling - not investing. My opinion is that there is a significant probability of capital destruction in the next 3-5 years in all the following names:
NVDA
AMZN
MU
AVGO
AMD
INTC
PLTR
LRCX
AMAT
KLAC
APH
GLW
GOOG/GOOGL
CAT
VRT
CEG
VST
NRG
FIX
GEV
PWR
EME
ORCL
ANET
WDC
DELL
SNDK
STX
ASML