Wall Street’s enthusiasm for the artificial intelligence industry, a major driver of market gains in recent years, hit a tough patch this fall. And on Tuesday, CNBC’s Jim Cramer said further declines in AI stocks are possible.
Looking at what caused the frenzy of AI trading to cool off, Cramer said the seeds of market concern were planted in September over Oracle’s earnings report, and from there the huge spending commitments for AI infrastructure, specifically ChatGPT maker OpenAI, have only snowballed.
“You know I still believe in artificial intelligence,” he said. “I think we should go through more disruption before we reach the promised land. If OpenAI is really worse than we think, I think we should even go through a massive shakeout.”
In Oracle’s case, investors in September initially cheered a 36% one-day jump in the stock price and a significant increase in its cloud computing backlog. However, media reports soon indicated that the majority of those future commitments were tied to a single OpenAI customer. Cramer said investors started showing signs of concern as Oracle turned to the bond market to help finance its AI infrastructure buildout and as OpenAI announced a number of agreements with other tech companies.
The software company’s leadership changes, announced on September 22, have been in the spotlight ever since, Cramer continued. He cited a recent Financial Times article that suggested former CEO Safra Katz resigned after objecting to the company’s spending plans, adding that Katz also cashed out about $2.5 billion in Oracle stock options this year. Cramer noted that Oracle’s credit default swaps (the cost of insuring Oracle bonds) have more than doubled in the past two months.
According to Kramer, another major change in sentiment surrounding AI trade occurred around the end of October. meta and microsoft reported earnings and said it continues to invest heavily in AI. This time, the company’s stock price fell in response, another sign that the market no longer welcomes all spending on AI with open arms.
But ultimately, he continued, OpenAI’s big spending commitments in September and October “appear to have pushed Wall Street over the edge,” with investors concerned that the company won’t be able to pay more than the $1.4 trillion it promised.
Even more concerning, Cramer suggested, were comments from OpenAI Chief Financial Officer Sarah Friar, who indicated earlier this month that her company could benefit from a backstop from the federal government. Fryer later clarified that OpenAI is not currently seeking a government bailout, but he continued that his comments prompted further scrutiny of the organization’s financial situation in the past few weeks.
Cramer hinted that AI darling Nvidia could “turn things around with a blockbuster quarter” on Wednesday evening’s earnings call, and while he was wary of getting too negative, he said he generally felt “we need a little more assurance about OpenAI’s financials, and that’s what I’m concerned about.”
“If we don’t do that, the whole AI organization is going to be a little bit more unstable than it was just a few weeks ago,” he continued.
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