If This AI Theme Really Deteriorates, These Are the 3 Stocks to Short

• StockStory Top Pick SMCI -2.26% PLTR -0.59%
• ORCL +0.13%

I recently penned an intriguing piece on Palantir (NASDAQ:PLTR), and my bear case behind this top mega-cap tech stock right now. Rest assured, that's one of the picks I'm including in this list of top short opportunities in the market, for those who are skeptical of the AI buildout and the amount of spending underway on ushering in a new technological era.

Quick Read

• Palantir (PLTR) trades at over 200-times earnings with valuation concerns raised by Michael Burry.

• Super Micro Computer faces margin compression from rising costs and fierce competition in servers.

• Oracle’s AI deals with companies like OpenAI may not generate the expected cash flows.

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That said, I think the overall tech sector has gotten to a point where investors are really starting to question how much further these companies can run. Valuations are near historic highs, on a number of different metrics - I personally prefer the Buffett indicator (the market capitalization of the entire stock market relative to GDP), but take your pick.

The thing is, a dozen or so stocks are now driving nearly half of the overall earnings growth of the S&P 500. This growth is driven almost entirely by spending tied to the AI trend, with plenty of investors starting to call into question how long this spending can continue, since so much of these dollars are derived from debt issuances from mega-cap tech companies. And given the circular nature of much of this investment, there's something that just doesn't pass the sniff test for certain investors.

Here are three AI-related stocks I think could really see a dramatic falloff, if the story around the AI ecosystem truly deteriorates moving forward.

Super Micro Computer (SMCI)

As a leader in liquid cooling technology for servers required to power the AI revolution, Super Micro Computer (NASDAQ:SMCI) stock has been on an incredible ride over the course of the past few years.

Indeed, Super Micro's stock price has been about as volatile as they come. As a leader in liquid cooling technology, which helps data center customers cool their servers much more efficiently, boosting profitability for those utilizing high amounts of compute, Super Micro's stock shot from around $4 per share in 2022 to a high of more than $120 per share in 2024. Since then, it's been a grind lower, with SMCI stock now trading closer to $35 per share, and that's after a recent spike.

On a year-to-date basis, Super Micro's stock is trading flat, which is notable considering the run other AI-related stocks have been on. Much of this has to do with declining gross margins, with margin compression coming form rising costs and fierce competition in this space.

For those who believe that Super Micro's stranglehold on new market share generation in the server/data center server market may be waning, this is a stock to consider shorting on any material spikes moving forward.

Palantir (PLTR)

As promised, I have to talk about Palantir (NASDAQ:PLTR) and the company's incredibly high valuation. In a recent piece, I think I did a pretty good job of outlining the bearish case that's been building around Palantir, and specifically the company's valuation, for some time.

Now, that's not to say that Palantir hasn't announced sky-high revenue growth and high adjusted operating margins in recent quarters. The company has, and its fundamentals do appear to be pointing in the right direction.

That said, at a price-earnings multiple over 200-times, and a price-sales multiple that's currently hovering at atmospheric levels, there are clear valuation concerns around this name. And any time a notable market-timing expert like Michael Burry (of "Big Short" fame) comes knocking and says your stock is a sell, CEOs like Alex Karp get worried.

I think Burry's concerns around the sustainability of Palantir's growth, given the potential shrinking of the U.S. government under a republican administration and spending concerns tied to the commercial sector, could play out. I'm taking Burry's side of the bet on this one. Palantir is a sell in my books.

Oracle (ORCL)

I've actually long been bullish on Oracle's (NYSE:ORCL) core software business. That business continues to throw off cash, and if Oracle was valued on the basis of these cash flows alone, I'd argue the company's valuation would be a lot more reasonable (and investment worthy for many out there).

The reality is that Oracle's stock price has surged more than three-fold over the past five years on revenues and earnings that have grown considerably over the same time frame.

That said, I'm of the view that the company's AI push and various headlines around the sheer size of Oracle's backlog from deals with companies like OpenAI could be overblown. OpenAI and other key players in the AI revolution have yet to show the sort of profits investors expect will be needed to finance this sort of spending. In other words, I'm concerned about the validity of the deals Oracel has signed, and specifically whether these deals will ultimately result in the kinds of cash flows investors have priced into their models.

For now, I'm taking the under on this view, and will look for more attractive opportunities from a valuation perspective in the universe of AI stocks that is growing by the day.

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