Shorts Are Circling Some of the AI Boom’s Biggest Question Marks

It’s the story of so many stock market manias: A transformative technology juices a few companies, a bunch of more questionable outfits follow in their wake, and Wall Street buys it all. Then time sorts out what’s real from fake.

Artificial intelligence, which has fueled the latest bounce in the S&P 500 Index as everything remotely attached to the technology sees its stock price soar, is the latest example. And it’s reached the point where some investors are betting against a few of those AI darlings, like Super Micro Computer Inc. and Lumen Technologies Inc., whose shares were up more than 250% at various points this year.

“We’re separating winners and losers,” said Mahoney Asset Management CEO Ken Mahoney.

Super Micro, Lumen and Symbotic Inc. stumbled in the final days of August after being targeted by bearish research reports questioning their valuations. Silicon Valley server maker Super Micro began last week with a market capitalization of around $36 billion and ended around $26 billion after a report from activist short seller Hindenburg Research on Tuesday pointed to “glaring accounting red flags” among other issues and kickstarted a corporate governance fiasco.

None of this is to say that AI won’t help transform the economy and spawn opportunities for hundreds of businesses the way Jamie Dimon, head of JPMorgan Chase & Co., suggested in April. But it isn’t stock market magic. And if history holds, there will be plenty of bumps on the road to success.

The angry reaction to Nvidia Corp.’s earnings last week shows how tenuous things can get. The chipmaking giant beat analysts’ estimates and the stock fell 6.4%. Why? Because after watching the shares soar more than 700% since the start of 2023, investors have grown accustomed to Nvidia not just beating expectations, but destroying them. And with its equity “priced for perfection,” Mahoney said, the $3 trillion company was primed for a $200 billion selloff.

Still, Mahoney was quick to point out that Nvidia and the other big AI plays in the Magnificent Seven have been largely consistent with results and growth. That’s what sets them apart from the likes of Super Micro, which have “been sporadic,” he said.

Predictably Unpredictable

That unpredictability combined with the rapid ascent of their stock prices makes them particularly prone to shocks from short sellers’ accusations. Roughly 24 hours after Hindenburg’s report on Super Micro hit, the San Jose, California-based company said it needed more time to assess internal controls over financial reporting. That’s why investors unloaded the shares.

Tuesday also was tough for Lumen Technologies, as Kerrisale Capital announced on the social media platform X that it was short the stock due to “worsening sales and margin trends amid a staggering debt burden.” The fiber networking company’s shares, which took off in July to rise from around $1 apiece to more than $6.50 in a matter of weeks, tumbled on the news and are now trading for around $5.

Meanwhile, SoftBank Group Corp.-backed Symbotic has lost 23% of its value in less than two weeks after a short report was circulated by investors maintaining that drone footage shows nothing happening at some of the company’s sites. The warehouse robotics firm has positioned itself as an AI beneficiary, striking a joint venture deal with SoftBank to buy its AI-powered systems last July when its shares were trading for more than twice Friday’s closing price.

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A spokesperson for Super Micro told Bloomberg News that the company “does not comment on rumors and speculation,” while a Lumen representative said the growth of AI will increase demand for its fiber network. Symbotic did not reply to email requests seeking comment.

As for Hindenburg, it struck again on Thursday with a report accusing iLearningEngines Holdings Inc., which describes itself as an “applied AI platform for learning and work automation,” as faking its financial figures. Shares plunged 53%, while the company said in a release that it believes the report had misleading statements.