The Oracle Speaks about the Near Future of AI
A great avalanche in stocks is coming soon.
I’ve been saying all year that the very thing that everyone was claiming to be virtually indestructible in stocks—AI because it is the industry of the future—would actually be the thing that will bring stocks crashing down first and worst in a cataclysmic dot-com style bust; and we see more evidence of that great avalanche starting to break loose in the news today.
One article points out how hard Oracle is already crashing and even asks if it is the first domino to fall. Oracle’s bonds have just been reduced to “junk” status by Barclay’s Bank. The news starts with darkening days for the Great One that many thought could not be toppled and that many have placed their faith in.
Bad days for Oracle, one of the tech giants riding the wave (or tsunami) of Artificial Intelligence . After a difficult month on the stock market, the stock has come under scrutiny from investment banks, who are starting to sound alarm bells.
The latest is Barclays, which has followed JPMorgan and Erste Group in downgrading the company’s debt outlook. The reason is simple and, in some ways, paradoxical: the gigantic, and extremely expensive, arms race for AI infrastructure is draining cash and ballooning debt to a level that’s starting to be scary.
Here is a snapshot the Oracle stock journey over the past month—crashed by about 30%:
Yet, nearly everyone in the stock investment world was saying just a few months ago that this kind of thing couldn’t happen. It couldn’t happen because AI is the industry of the future. As I pointed out repeatedly back then, it was also the most absurdly overpriced; and—while I have no doubt AI will be the industry that defines the next era in commerce and social adjustment (and mal-adjustment)—it will crash the hardest just as the leaders all did at the start of the internet era before some AI businesses recover to lead us into that future.
While the Oracle has revealed to us though the patterns in its avalanche (like reading tea leaves or chicken entrails) what the imminent bear market of the future holds by showing how quickly and unexpectedly such a crash can come among the overpriced market leaders, the article just quoted above and another one further down on this subject makes it clear this is not just an Oracle one-off.
The problem isn’t unique to Oracle, but its situation, as Barclays notes, is “particularly prominent.” The entire hyperscale industry is financing the AI gold rush by issuing bond after bond, putting pressure on credit markets.
The prominence has fallen first. Oracle slid away first only because it has been betting the house more aggressively than all of it its rivals on AI.
At the heart of the problem is the cost of building AI data centers, which, according to industry data cited by Barclays, can cost as much as $50-60 billion per gigawatt, triple that of a traditional data center (with over half of the cost going to hardware, such as Nvidia GPUs).
And guess what little surprise hides in that? We all get to pay for it because it is significantly driving up the cost of electricity wherever these centers go in. So, soon, there will also come rebellion to slow the way.
It’s no coincidence that back in October, JPMorgan (which cut its rating [on Oracle] to “Neutral”) estimated that Oracle was aiming to spend over $35 billion in capital this year. A veritable black hole for liquidity. It’s no coincidence that the decline in Oracle’s stock price occurred primarily after JP Morgan’s downgrade.
When the insanity becomes an overbearing load at the top of the mountain, a single loud shout by an entity with a voice as big as JPMorgan can be the one thing that brings it down. That fragility due to extreme prices of development and the deeply remote (in years) delivery of returns on investments is a story of risk that is endemic to the entire AI industry right now, which is why they will all go down before a few rise down the road from the ashes. The high electrical costs on top of the high construction costs, and the huge strain of building large enough data centers are critical components that are also weighing heavily on these companies, and the other article says that is bringing down many businesses in the industry. Apparently, too few people saw the obvious months back:
Perfect isn’t good enough [now], and any sign of weakness is a disaster: Justified or not, that’s the current mood in the markets about the AI boom.
So, the whole slippery slope is starting to cascade downslope:
Generative artificial-intelligence services require massive data centers and state-of-the-art chips and server racks that don’t come together quickly. The companies at the heart of AI now are talking about years—plural—of major investments still ahead [before returns are seen].
The latest episode of fragility started last week, when shares of some of the sector’s leading lights lost ground. After a broad-based recovery Monday on news of a possible end to the government shutdown, AI-exposed stocks fell again on Tuesday. Nvidia lost 7% last week and slipped another 3% on Tuesday—leaving it well shy of its $5 trillion market-cap milestone last month. [Down 10% within a week’s time.]
Even companies posting strong financial results haven’t avoided investors’ wrath lately. Meta Platforms has shed nearly 17% since its solid third-quarter report two weeks ago that included another plan for blowout capital spending. Palantir, the AI software company that had soared to an absurd price-to-forward-earnings ratio above 250, is down nearly 8% since its respectable earnings last Monday….
I said the avalanche would begin when investors started showing they are tired of spending more to wait longer because that was the dot-com pattern.
There are, of course, real reasons to worry about the sustainability of the boom. Chief among them is that there is far more AI computing infrastructure spending than there is AI revenue, a gulf that is widening by the day.
OpenAI says it is planning to spend $1.4 trillion in the next eight years. But it is pulling in only around $20 billion of annual revenue today, and it lacks a clear business model to reach the hundreds of billions it needs within the next few years to keep spending growth going.
All exactly the pattern I’ve been saying we’ll see because it was how things fell apart in the dot-com bust that so many were telling you could not happen today (just as so many said back then). But now, here we are.
The future profits back then would eventually arise for many companies that ultimately survived—such as Microsoft—but investors got impatient with how long it would take to get there; and, with the lack of any business model, at the time, showing profits that would make sense out of both the costs of developing that future and of existing stock prices, they began to crack. When everyone started to see the mountainside was sliding, the absurdly irrational enthusiasm gave way in a panic slide that lasted for two years.
The costs today are far more extreme, so the overburden ready to fall is only worse.
OpenAI is already projecting that losses will swell to $74 billion in 2028. So skittish has the mood become that Chief Executive Sam Altman felt the need last week to defend the company on X, saying the spending was “understandably” causing concern….
Not lack of profit until 2028, but losses growing even worse by 2028.
Oracle reached a $300 billion deal with OpenAI in September to supply it with AI computing power, and it raised $18 billion through a bond sale the same month. That is a foretaste of what analysts say will be a growing pool of debt tied to data centers.
And now we see that slope of debt is also showing cracks.
Then there are the inevitable hiccups from shortages of power and other supply-chain bottlenecks. CoreWeave, an AI cloud player backed by Nvidia, reported strong earnings on Monday but noted a delay in data-center construction that would dent revenue in the current quarter. Its shares slid 16% on Tuesday and have lost a third of their value since the beginning of last week….
So, that is two AI stocks that are already deep into their own bear markets!
Even so, the very publisher reporting this (MSN) falls into the same typical mainstream financial media balderdash that just never gives up on insane hopes:
Overall, tech valuations don’t look outrageous, especially with companies like Nvidia minting profits.
Good luck with that, MSN! You didn’t see the present slide coming when it was not hard to see, so you don’t see the rest of what is coming, even as you report the facts that are sliding. That is why you are hopeless. Hopelessly delirious. I’ll stay with reporting what I am certain is coming based on what I am actually seeing and normal cause and effect, and you can keep to reporting later that it DID!
The broader avalanche is beginning, too
Meanwhile, economic forces that I’ve said will break the ice loose for a great avalanche in the general stock marketplace (as in well beyond AI), are also continuing to make cracking sounds:
The breaking point for stocks in general keeps closing in, and we see that only a day after I wrote …
I have been covering jobs a lot because I do think they’ll be a key breaking point that is being masked right now by the government shutdown postponing the labor reports….
An article in the headlines below says that jobs and inflation, the two main things I’ve been tracking as I’ve predicted they will be key points for the destruction of stocks in general and the economy, have now become America’s top two economic concerns:
Voter frustration over affordability fueled Democratic wins in last week’s state and local elections, and on top of that, Americans are becoming uneasy about the job market too….
Some 55% of employed Americans say they’re concerned about losing their jobs, according to a recent Harris Poll conducted for Bloomberg News. That angst follows a drumbeat of layoff announcements by major employers, including Amazon.com Inc., Target Corp. and Starbucks Corp. Outplacement firm Challenger, Gray & Christmas Inc. calculated the most job cut announcements for any October in more than two decades.
It comes layered on top of households’ exasperation over the cost of living. A 62% majority in the Oct. 23-25 poll said the cost of their everyday items had climbed over the last month and nearly half of those people said the increases have been difficult to afford.
These troubles are forming cracks on slopes adjacent to the avalanche in AI that is starting to move. That is why all the rumbling that soon happens from AI will jar all the other loose fluff down in its undertow and it rumbles by … just as we saw in the dot-com bust. High tech leads the way down so falls the furthers, but nearly everything else comes down, too. Bad job reports and rising inflation are loosening the load with numerous cracks, getting it all ready to fall.
While the government has not been reporting inflation, consumers surveyed say they are seeing it climb over just the past month. That is the timing I predicted last summer for inflation from tariffs to ramp up to a level that is hard to afford. It is going to keep coming—both the rise of inflation and the fall of jobs—until reality breaks through all the denial, and the rumbling of high tech brings it all down.
As early as tomorrow, the government may be back in business and can start reporting inflation again soon, so maybe the Bureau of Lying Statistics can finally cough the truth out. You’ll hear some loud market cracks whenever that truth starts to come through. However, don’t count on the government getting truthful too quickly, even after it opens. It’s not in its nature.
I mean, look at how hard congress and the executive branch have been trying to avoid coughing out the truth about all the Epstein rapes involving young women, in spite of how many women have come forward. You’d think taking out scumbags who do crimes against our young women in this country would be a no-brainer for anyone with any moral fiber who didn’t participate in those crimes. Yet, all congress and the executive branch can seem to do is find ways to endlessly bury it.
But, hey, with a move to reopen government possibly in the offing, maybe they will finally have their hands untied so they can take care of that unpleasant business. (Sure, and maybe they will all be caught up to heaven with shining halos on their heads, playing golden harps, too.) For now, about all we have is a bipartisan duo trying to force a vote. I guess they have a few members of congress rallied behind them. It will be interesting (and frustrating) to see how Mike Johnson manages to finagle around that this time in order to keep his pedo pals safe. (Maybe an early Thanksgiving break for the House followed by a Christmas break to last through the New Year. After all, keeping government shutdown while paying congress doesn’t seem to be any issue for him.)