Cracks in the AI Narrative? Margins Suddenly Matter
Some of the shine has started to come off the recent mega IPO of SpaceX ($SPCX) in the past week. The stock has dropped roughly $60 a share from its post IPO high of $220.
Meanwhile, AI chipmaker Cerebras Systems ($CRBS), which would have been the biggest public offering in most years, is down a quarter from its post IPO peak. It looks like the shares will slide substantially Wednesday after reporting quarterly results after the bell on Tuesday. Both top and bottom-line numbers beat expectations and sales rose almost 95% on a year-over-year basis. However, investors are hammering the stock due to the company’s gross margin outlook.
Indeed, chinks seem to be developing around the AI narrative that has powered most of the market’s gains over the past three and a half years. Both Anthropic and OpenAI are preparing their own massive IPOs and they need to raise large amounts of new capital as they build out their businesses. The whole AI ecosystem needs both companies to be successful as they have committed to over $1 trillion for future compute power.
The hyperscalers are investing hundreds of billions annually and issuing a lot of equity and debt to do so, to build this massive AI infrastructure. And the companies that are supplying the “picks & shovels” to this huge effort, such as ($INTC) and Nvidia ($NVDA), are getting rich during this boom.
However, there are some growing concerns around OpenAI and Anthropic. ChatGPT slipped under 50% market share in the chatbot space in the U.S. for the first time in May. Both CNBC and The Wall Street Journal reported two weeks ago that OpenAI was mulling over substantial price cuts to better compete against the likes of Claude and Gemini. A pricing war is the last thing investors would welcome as OpenAI and Anthropic moved towards their IPOs.
ChatGPT, Claude and Copilot from Microsoft ($MSFT) have all recently moved from a subscription-based pricing model to a usage-based one. This has eliminated a lot of “tokenmaxxing” that was going on with some customers. Still, the long-time impact on AI demand growth from this pricing change is an unknown for the moment.
There are also growing worries around inroads being made by much cheaper Chinese AI models. Microsoft reportedly is thinking about hosting DeepSeek for Copilot Cowork, which could trigger turmoil across the industry. The Philadelphia Semiconductor Index (SOX) was off nearly 8% in trading Tuesday and the semiconductor-heavy Kospi in South Korea dropped over 8% Tuesday.
Now it is true that the SOX has had parabolic move this year, with the index at one time getting to an absurd over 70% above its 200-day moving average. The sector was overdue for some significant profit-taking. Even after Tuesday’s pullback, the semiconductor index is still up over 155% over the past 12 months.
Whether Tuesday’s move was just a hiccup or the start of larger move down is unknown. However, it does feel like some of the air is starting to come out of the AI narrative and this could mean significant downside in the weeks ahead.
At the time of publication, Jensen had no positions in any securities mentioned.
