Magnificent 7 Valuations: Could the AI Chip Boom Turn Into a Bust?

During their recent episode of the Value Options Podcast, Travis and Carlisle discussed Magnificent 7 Valuations: Could the AI Chip Boom Turn Into a Bust?. Here's an excerpt from the episode:

So that's why you could say, okay, well, the Democrats swept and maybe Texas and some of these states aren't building some of these data centres, less approvals, less demand for the chips maybe. And so that's kind of why you see the Nvidia is kind of selling off today. And some of these electric companies like Vistra Energy is down like 14% and they're a big Texas utility.

So they were expecting huge power demand from those data centres. And so we'll have to watch what happens there.

[Tobias]

I agree with that. I agree with all of that. I think that the cyclicality of those formerly cyclical businesses is the ultimate question that folks are going to have to answer.

For mine, I think they're probably still cyclical because what we're seeing is that sort of bullwhip effect where you have a lot of demand in the very short term, allowing them to charge unheard of prices, which is where their margins come from, which is why they're earning so much, earning so unusually. Does that demand persist at that level, like that frantic demand for chips? Does that persist for that level for an extended period of time?

I just can't see how it can, because they're all just overspending. And at the moment it's coming from the hyperscalers spending more than they're taking in. They're borrowing and they're raising equity capital and their free cash flows are massively negative.

So they can't sustain that without the revenues on top, which is the thing that we were talking about right at the very top. Unless the revenue show up, ultimately the tail end of that bullwhip is going to continue to be cyclical. And I think that we're probably, which is not to say they're not great businesses, they're funny businesses to buy.

You don't buy them when they're super profitable and optically cheap, because the market knows that profitability is short term and you buy them when they're expensive and loss-making for the most part.

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