AI Bubble Warning: Key Indicators & Analysis — Full Breakdown & Transcript

[00:00] Wall Street Journal is now warning us when the bubble is about to go bust. And they actually refer to an article, which is kind of scary, but it's an article from 2000, where they say internet companies have grown to the point where they are collectively valued at $1.3 trillion,

[00:17] or about 8% of the entire stock market. And this is scary because if we just start with how much of a percentage of the entire stock market, the tech industry is right now,

[00:33] we probably sit at somewhere around 36.17%. I just asked a Google overview really quickly. What percentage of the entire U.S. stock market is IT, tech?

[00:45] 36%. Okay? But then you might say, oh, well, you know, tech is so much wider, right? That's not fair. Okay, fine. What about we just take one company? Because remember, The dot-com bubble argument here was that 8% was the internet bubble of the entire stock market.

[01:04] 8%. And then the NASDAQ collapsed like 85 or something percent, which real estate like sailed right through, which is glorious. Now, people always assume that housing has to crash at the same time as the stock market does.

[01:16] There can be totally different cycles. Like we had saturation and high interest rates in the late 70s, and we got Paul Volcker in 80 and 82. did not have a real estate crash, despite those mega high interest rates. Different cycle.

[01:28] Now then you had savings and loans later that decade, that was a problem. Obviously in 2008, that was a problem, which actually coincided with the stock market, more rare. But in the dot-com bubble, you did not have a real estate crash,

[01:40] just like you did not have a real estate crash in 80 or 82, which were both recessions. All three of those were recessions. But anyway, the point of this is that 8% is what the internet stocks represented as the entire stock market.

[01:53] And so then I'm like, what percentage of the entire U.S. stock market is Microsoft? Just Satya Nadella. Satya Nadella, good sir!

[02:05] How much is your company worth compared to the entire U.S. stock market? Folks, the answer is 4.1 to 4.6%. Represents about 7% of the entire S&P 500.

[02:18] about half of that internet bubble example, just one company. Add in NVIDIA and you're basically there. So just NVIDIA and Microsoft alone

[02:30] put you at dot-com bubble magnitude and size. Now, the good news is NVIDIA has lots of money. You know who doesn't have lots of money? Microsoft. And now I know I'm bagging on a stock

[02:42] I have exposure to, my goodness. But that's what I do on this channel. I have a tendency of just speaking my mind, even if that's bad. with a book. But yeah, I've got a close microphone. Oh, man, dude. We're getting a little tighter

[02:54] here. I mean, look at this. I got $95.8 billion in bills, $76.8 billion of cash in short-term investments. This number is smaller than this number. That is not good. Now, in fairness,

[03:10] they got billion of free cash flow Sorry was that in a quarter or in a year Let me look Free cash flow Oh that was for the year Is it No it was for the quarter Okay good good good good good Okay That is type property yeah it was for the quarter Okay In fairness these

[03:29] bills are due in a year, and they do have $14.4 billion of free cash flow per quarter, so that's good, but, you know, it's not the cleanest shit. They still technically right now do not have enough cash to pay all their bills this year, so they have to rely on free

[03:44] cash flow, which means there's less money that they can turn around and actually invest or use to pay down debt or buy back stocks. Something to think about. And that's actually where the warning comes from. See, the Wall Street Journal says how to know when the AI boom is about to go bust.

[03:59] And what they say is that you can look for signs that the party is about to stop, the music is about to stop playing. The biggest sign has to do with the sucketing. They say when the window for new capital closes, also known as a funding gap, that's when the dot-com bubble started to deflate.

[04:22] The funding gap. And so that's what they talk about in this Barron's article over here from 2000, which is wild. This article is called Burning Up, Warning Internet Companies for Running Out of Cash, hyphen hyphen, fast.

[04:34] When? See, they forgot the W I mentioned earlier. That's because when you print these articles, you know, back in the day for a newspaper, the first letter is capitalized, you know? Anyway, when will the internet bubble burst?

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[05:45] Companies are likely to start collapsing before the end of the year, or they're either going to sell to rivals or go out of business altogether. You've got companies like CDNow, Secure Computing,

[05:57] Dr. Coop, Nedscape, Infonautix, Infrawear, and Beepod, all out of money. We're going to burn through all of our cash within the next 12 months. We're out of money.

[06:09] And they're going to have to raise money. And as soon as they can't raise money, well, that's sad. Perhaps one of the best-known companies on the list, Amazon, has only 10 months of cash left.

[06:21] It's weird how things kind of sound similar, don't they? And listen to the comment here. Quote, it's only when the stock price comes unglued that the burn rate matters anything. In other words once the stock price starts going down that when companies and people and investors start going oh how much cash do you have Oh crap you don have enough cash to get through the year at this spending rate Uh that not good

[06:45] And then, quote, the hunt for cash will become more desperate as reserves deplete. I get that. You know, I was saying earlier that startups, a lot of them burn a lot of cash.

[06:57] They have to raise money just to survive. I'm very grateful that our startup turned to operating positive operating cash flow, which means our cash flow is greater than our burn, which is great.

[07:10] And we're a little baby startup, right? But it means we can generate more with the invested capital we have. But that's not the case for many startups. It's totally not the case over here. What happens is companies will start raising money out of desperation,

[07:24] not because then they can grow faster, but because they need to raise money just to survive. The Wall Street Journal says that's the danger. When companies need to raise money just to survive, and then they can't raise the money,

[07:37] that is when the bubble is over. Now, they do say we're not there yet. And I agree that we are not there yet. I'd like to use Corweave as an example. Corweave just raised $2.6 billion.

[07:51] And if I go to their idiotic balance sheet, sorry for the Corweave investors, When I go to this moronic balance sheet, I see $5.5 billion of cash and cash equivalents.

[08:05] They do have accounts receivables, about $2.5. That gets us about $8 billion of receivables. Now, they just raised another $2.5 billion. Great! That gets us to $10.5 billion.

[08:17] But guess what? $10.5 is still lower than the debt that they have due within the next 12 months. that's not ideal.

[08:31] So, what does that mean? Because, again, you can look at it right here. I've got 3.6 in payables. I've got 6.4 in liabilities. I've got recourse debt of 6.2,

[08:43] non-recourse debt of 1.2. I've got operating leases. I've got other crap to spend. Blah, blah, blah, blah, blah. I already basically backed out the deferred revenue over here. I didn't count that in the liabilities. So, in English, they have $18 billion of bills to pay and $10 billion of cash.

[09:02] 18 is way bigger than 10. Okay? Not enough cash. Yet how do you know the bubble is still cooking? So, yeah. Because when, with that balance sheet, Corweave decided to raise more money because they're losing so damn much,

[09:17] the transaction was meaningfully oversubscribed, attracting exceptional investor demand, and priced at SOFR plus 5.5%. The delayed draw term facility was issued through Corby financing DTTLV-V, LLC.

[09:37] In other words, morons are still buying this trash. Which means the bubble and party is still going. That is not to be confused with an oversubscribed IPO.

[09:50] IPOs purposely get over or underpriced so that way they can market how everybody wants in on the oral IPO The oral IPO in my opinion is not good You can look up my opinion on it Just type into YouTube Meet Kevin Aura Ring IPO

[10:06] You'll see my whole opinion on it. We go through the balance sheet and everything. Spoiler alert, there are some problems. But anyway, basically, the Wall Street Journal is saying, hey guys, the party can keep going for a while.

[10:18] Anyway, we look through the rest of this. we see, they make references to Freddie Mac needing to raise money. They also go on to say that the AI trade today still has a lot of momentum.

[10:31] Anthropic, though, and these are some waves that are coming up, has paused its plan to IPO. There are bumps in the road. Sorry, Anthropic has delayed its plan to IPO. Opening AI has paused until after

[10:44] Anthropic IPO. Anyway, those are my little canaries in the coal mind, and outside of, like, little hiccups there, there aren't signs that the capital window, the great suckening, is closing.

[10:57] That's a good thing. That is bullish on it. Like, I had some more on this morning, leave a comment. And they're like, wait, Kevin, what do you mean the market's about to break and you're bullish?

[11:09] I don't get it. It's like, all right, how stupid do you have to be? I just spent 20 minutes going through a SockGen article about how SockGen is warning that crap is about to hit the fan,

[11:22] and then my opinion is you should buy it, because the bubble ain't over yet. I don't understand how those two things are so hard to understand at the same time, but sometimes the room temperature IQ comments section just doesn't get it.

[11:36] the funding gap for the AI trade could, though, quickly reverse, says the Wall Street Journal. Yes, this is true. That's why you've got to watch the canaries.

[11:48] Chances are the market will know when the market sees it. Okay, blah, blah, blah. So anyway, I think this is actually a really good article because what they're telling you is another thing you could look at is once you see companies that become unable to raise money,

[12:03] that's when the bubble is starting to come to an end. We're not there yet. So another example of one to watch is going to be the SpaceX money raise. SpaceX, we all know, is going to have to raise money. A lot of money.

[12:16] Probably somewhere around $400 billion. Now, they're still actually actively deploying, like, the $100 billion they just raised. So they don't, in my opinion, necessarily have to raise right now. But I would guess within the next six months, they're probably going to have to come out and go,

[12:29] Hey, guys, we're raising $50 billion. We've got to buy some Jensen chips. And if that's over subscribed, great. Circular bubble can keep going.

[12:41] If all of a sudden it's like, huh, SpaceX needs to raise the interest rate. Huh, underwhelming demand for SpaceX debt. That's when you get nervous.

[12:53] That's an interesting point of view from the Wall Street Journal. I thought that was a good one. If you like that video, check this one out. I think you're going to love it. I don't even know how to take these things into my opinion. I feel like nobody else knows about this.

[13:05] We'll try to advertise here in Seattle. Congratulations, man. You have done so much. People love you. People look up to you. Kevin Passer, F.I. National Analyst. And you two both need Kevin. Always great to get your take.