The AI boom has driven a significant increase in related stocks, but obviously not all companies are truly fireproof. Only after the tide recedes do we know who is swimming naked.

Media reports that some investment institutions have started shorting some of the AI concept stocks that have been rising with the trend, including $Super Micro Computer (SMCI.US)$ and $Lumen Technologies (LUMN.US)$ , both of which saw their stock prices surge by over 250% this year at one point.

By the end of last month, super micro computer, Lumen technologies, and $Symbotic (SYM.US)$ Encountering short selling, institutions questioned its valuation, leading to a big drop in stock price. Super Micro's market cap was around $36 billion at the beginning of last week, but dropped to around $26 billion by the end of the week, due to a report released on Tuesday by the well-known short selling institution Hindenburg Research pointing out 'obvious accounting issues' and other problems, triggering a corporate governance crisis.

"We are differentiating between winners and losers," said Ken Mahoney, CEO of Mahoney Asset Management.

Analysts believe that the reaction triggered by Nvidia's earnings report last week shows how unstable the situation can become. Although the chip manufacturing giant exceeded analysts' expectations, its stock price fell by 6.4%. Some analysts attribute this to the fact that since the beginning of 2023, Nvidia's stock price has risen by over 700%, and investors have become accustomed to Nvidia not just surpassing expectations, but thoroughly beating them. In the case of its stock price being "perfectly valued", Mahoney stated that this $3 trillion company is ready for a sell-off of up to $200 billion in scale.

However, Mahoney pointed out that Nvidia and other large AI companies in the "Big Seven" of the US stock market have consistently performed well in terms of performance and growth. That's why they are different from companies like Super Micro, whose performance has been "consistently unstable," he said.

Unstable performance attracts the attention of short-sellers.

Analysts believe that this instability, coupled with the rapid rise in stock prices, makes this type of stock particularly vulnerable to accusations from short sellers. About 24 hours after the release of the report by Siker's Castle, super micro computers responded, saying that more time is needed to assess the internal controls of the financial report.

Tuesday was also a difficult day for Lumen Technologies, as Kerrisale Capital announced on the social media platform X that they were shorting the stock, citing 'deteriorating sales and profit margin trends, as well as a huge debt burden.' The stock of this fiber optic network company rose rapidly in July, from about $1 to over $6.50, but plummeted after the news broke, currently trading at around $5.

Meanwhile, Symbotic, supported by SoftBank Group, saw its market cap shrink by 23% in less than two weeks, as a short report claimed that drone-shot videos showed that some locations of the company had no operational activities. This warehouse robot company positioned itself as a beneficiary of AI, reaching a joint venture risk investment agreement with SoftBank in July last year to purchase its AI-driven systems, when its stock price was more than double the closing price on Friday.

Siker's Castle is not only focused on super microcomputers, as the institution once again challenged iLearningEngines Holdings Inc. last week, releasing a report accusing the company, which claims to be an 'AI platform for learning and work automation,' of falsifying its financial data. The stock plummeted by 53%, while the company stated in a declaration that it believes the report contained misleading statements.

The digestion period is currently underway.

However, historically, when the market becomes infatuated with new technologies, such extreme fluctuations occur, from the invention of the radio to the development of the internet. Currently, the benefits of artificial intelligence are still being explored. Valuations of AI startups have soared, and this situation has spread to the stock market, creating a frenzy of AI concept stocks.

John Belton, investment portfolio manager at Gabelli Funds, previously stated,

"The stock market always goes too far too fast, and then goes through a digestion period. For many companies, we are experiencing a healthy digestion period."

This is not the first time that investors have been bearish on companies whose stock prices have soared due to AI expectations. In March, Xingdengbao shorted Equinix Inc., the owner of data centers, while in July, Culper Research questioned the AI vision of bitcoin miner Iris Energy.

From this perspective, the decline of some AI concept stocks and the questioning of the valuation of companies related to this technology indicate that investors are beginning to consider how much value all of this will ultimately have and which companies will have long-term development.

"We don't know how large-scale this will be, and this market context may result in some small-scale excess," Belton said. "We are still in a phase of the generative AI investment cycle, and it is difficult to determine the shape of the long-term cycle at this stage."

Editor/Lambor