Where is the Next Stock Market Bubble Coming From?

Every so often, a sector, theme or region suddenly grabs investors’ collective attention. A sector moves, people make money, and the media picks up on the gains and goes on — and on — about the theme. This causes more investors to take notice, get greedy and start buying. This sparks more media frenzy, and even more investors pour in.

Stocks within the bubble theme go up, and up and up — until they don’t. Then everyone wants out at the same time. Lots of money can be made (by a few) on the way up, but it sure can be ugly for investors on the way down. Let’s look at three prior stock market bubbles, and one that might become one.

3D-Printing-This was a massive bubble several years ago. Everyone was going to have a 3D printer at home, maybe even one in every room. Trucking and delivery companies were going to go out of business as consumers just printed what they needed at home. The stocks of 3D companies soared and soared, and then crashed. What happened? ?Demand just never materialized as expected. The technology was emerging, but stocks got ahead of themselves. The bubble popped, but, unlike some others, there is still a real industry here left in the ashes.

Dot Com Stocks-The internet was going to change the world (I guess it did) and companies were hopping on the bandwagon. Investors got greedy, which is a necessity for any bubble.

Dot-com IPOs could soar 400 per cent on the day of their listing. No one cared about profits, only growth. If your company didn’t have dot.com after its name, it was going to be a dinosaur. It was, truly, a stupid time in the market. Fortunes were made by investors and companies that had no idea what they were doing. And then, as usual, the party just ended.

Profitability became important again, and the money pipeline investors were pumping to startups closed. Some stocks lost 90 per cent of their value in a matter of months, if they even survived at all. Amazon.com Inc. traded for less than 30 cents a share, though it was one of the survivors.

Electric Vehicles (EV)

Tesla Inc. started this bubble off. That tends to happen when a stock soars to US$410 per share from US$1.05 in less than 10 years. The interesting thing with the?EV bubble?is that it spawned other bubbles. EV manufacturers soared in value, and so did battery, lithium and copper companies and anything else that went into the manufacture of EVs. Some of these bubbles are still ongoing.

There have been big successes and big failures in the sector, but the growth potential is intact. The market share of EVs is still low, but is expected to grow for the next 20 years at least. Governments are mandating EVs, and price points are coming down. This bubble may turn out to have some legs.

AND THE WINNER IS: ARTIFICIAL INTELLIGENCE (AI) FOR NEXT BUBBLE SECTOR

This theme gets our vote for the next most likely bubble. Investors are scrambling for new ideas, so the?mere mention of AI?in a press release moves stock prices, and large tech companies are mentioning AI hundreds of times in their conference calls. Investors see AI as the next greatest thing, one that will lower costs, boost productivity, boost margins and accelerate growth for hundreds of companies. Frankly, it probably will. But that, of course, doesn’t mean all AI companies are going to be winners.

But I am tossing onto the field a ton of caveats for investors who should be careful getting into a stock (or even considering getting into it) that just gained $200 billion plus in market cap in a single trading session.

For perspective, McDonald's ENTIRE market cap is $209 billion! I’m speaking about chip manufacturer Nvidia stock-the Big Dog in the AI sector.

A stock price bubble could be loosely defined as a situation when the price of a stock completely detaches from reality to the upside. This is often when a sexy investment thesis captivates Wall Street trading desks, sending the stock higher. Then retail investors get excited and buy without doing their fundamental homework. The bullishness feeds on itself. Until it doesn't.

C3ai?said this week that it will lose $68M this year and expects to lose another $60M at the end of its next fiscal year. The company has never made a profit yet its stock is up 160% this year. That’s too bubbly for my britches.

Nvidia is proving it will be on the leading edge of a real life growth AI movement. Many CFOs I know say they are allocating mega money to AI development.... and a lot of that money is being spent on powerful Nvidia chips.

Bubble characteristics on Nvidia? Sure. Will the stock come back to Earth? Sure. But to say Nvidia is another long-term stock bust is probably missing the point.

The AI Revolution is not hype as there will be massive winners such as Microsoft, Nvidia, and Google and also clear losers on the AI roadkill list. As always the trick is to separate the winners from the losers before you get burned?as your sure winner stock plummets to earth.

Have a safe Memorial Day weekend and please remember those to whom that day is dedicated.

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Ed Cardon

EPC Search International LLC

470-345-0846

[email protected]