Editor's note: SpaceX is the hot new stock everyone is talking about... But what they don't realize is that the company is part of an expanding AI bubble. It's a fool's game to try to call its peak, but Stansberry Investor Advisory editor Whitney Tilson says that now is not the time to be overly bullish. In today's Masters Series, adapted from the June 11 issue of the free Whitney Tilson's Daily e-letter, Whitney shares why you should be wary of the overvalued AI stocks and where you should focus your attention instead...
Beware of the AI Bubble and Look for Beaten-Down, Out-of-Favor StocksBy Whitney Tilson, editor, Stansberry's Investment Advisory All eyes are on SpaceX (SPCX). Last week was the company's long-awaited IPO... SpaceX targeted an offering price of more than $1.75 trillion (and surpassed that, hitting an intraday $2.8 trillion market cap), which would value it at approximately 100 times revenues. That's despite tepid 15% top-line growth last quarter and large, accelerating losses. But hey, since those losses are being driven by AI investments, any valuation can be justified, right? Not in my book... You see, I think the stock is maybe worth 10% of its target. That's why I think we'll look back on this as the most overhyped, overvalued large-cap stock of all time – at least until OpenAI goes public (speaking of which, here's the latest bad news from the Wall Street Journal: OpenAI is considering drastic price cuts to compete with Anthropic). To be clear, I think AI is a big deal – maybe even as big as the Internet. But my "spidey sense" is increasingly telling me we're near the top of an AI bubble... The hype and overvaluation around AI and SpaceX remind me of early 2000. Back then, investors were right about the importance and impact of the Internet... but lost 80% to 100% of their money. And here are some more similarities between then and now:
- Investor adulation of tech CEOs and young wonderkids. Remember 29-year-old dot-com investor Ryan Jacob in 2000? Then read this WSJ article about a 24-year-old "AI wiz" who has more than $20 billion in assets under management.
- Criticism of Warren Buffett (such as Porter Stansberry's new book, Warren's Mistakes, which I discussed in my June 2 e-mail) and Berkshire Hathaway's (BRK-B) stock underperforming badly.
- AI stocks hitting the same market-concentration level that led to the bursting of previous bubbles, including 2000's dot-com bubble. This chart posted on social media platform X by Barchart showed that the "AI Big 10" stocks recently accounted for 41% of the S&P 500 Index's entire value:
- The bubble driving the real estate market. As this recent WSJ article details, Manhattan's office market is poised for its best year since 2000, with AI firms leasing large working spaces.
- An exponential spike in investment in the hot new sector by hundreds of companies, all of which, mathematically, can't earn a decent return on that investment.
But identifying a bubble and identifying the exact top of that bubble are two different things... I'm often amazed at how foolish things can become even more foolish. So I don't spend a lot of time trying to time things perfectly. It's better to be roughly right than precisely wrong.
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 What You Missed This Week Bloomberg recently reported that SpaceX will turn 4,000 of the company's "insiders" into millionaires. Meanwhile, more than 100 million Americans could be forced to foot the bill thanks to a new financial rule being smuggled in alongside SpaceX's IPO. Whitney Tilson – the man CNBC nicknamed "The Prophet" – went live this week with details on how to protect your money now. Click here for more details. |
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My team and I aren't engaging in rank speculation in the AI sector. Instead, we're focused on beaten-down, out-of-favor stocks producing gobs of free cash flow ("FCF"), like:
- Global Payments (GPN) – trading at 4.8 times this year's adjusted earnings and hit a 10-year low last week
- PayPal (PYPL) – trading at 7.9 times and recently hit a 10-year low
- Intuit (INTU) – trading at 9.9 times and hit a six-year low yesterday
- Campbell's (CPB) – trading at 10.5 times, just hit a 32-year low last month, and its 7% dividend is easily covered by its FCF
- Clorox (CLX) – trading at 15.1 times, pays a 5% dividend, and hit a 12-year low several weeks ago
- Lululemon Athletica (LULU) – trading at 9.8 times and hit an eight-year low yesterday
That said, they're all facing issues. But how much bad news is already priced into each stock? And are these companies permanently melting ice cubes? Those are just some of the questions my team and I are looking into for each company. There's one thing I've learned the hard way over a quarter century in the markets: If a company's earnings go from $5 per share to $1 per share, it doesn't matter how cheap you buy it. That stock is going down – a classic value trap. Among the six stocks I mentioned above, only Global Payments is an open recommendation in our flagship newsletter, Stansberry's Investment Advisory. We were early when we first recommended it a year ago, but we continue to believe the stock is a good bet to triple. And in our latest issue, we gave an update on the company:
Global Payments generated $7.7 billion in revenue last year and FCF of around $2 billion. The Worldpay purchase will add around $5 billion of revenue and $1.5 billion in FCF annually.
In its first quarter as a combined company, revenues increased 5.5%, and earnings jumped 10%. Management said it plans to return $7.5 billion to shareholders through the end of 2027, including $2 billion this year.
Right now is a fantastic time to buy back shares. Global Payments' stock is insanely cheap with a forward [price-to-earnings] P/E ratio of around 5. The S&P 500 Index trades at an average forward P/E ratio of 22 today.
We also highlighted the company's price-to-earnings-growth ("PEG") ratio, which is a good way to see if a company's P/E is too high or too low:
Management expects Global Payments' earnings to grow 14% this year, and Wall Street analysts expect similar growth over the next three years. That means Global Payments' stock has a PEG ratio of 0.36 (a P/E ratio of 5 divided by earnings growth of 14).
Anything less than 1 means a stock is cheap. When it's less than 0.50, that tells us investors don't believe the growth story. That's what we're seeing with Global Payments today. The market is still waiting to see how the company digests the Worldpay acquisition and the additional $7.7 billion debt it took on for it.
We're not worried. With an investment-grade credit rating, Global Payments can easily afford its debt. And because of the acquisition, it's the dominant merchant acquirer whose growth should continue.
So not every beaten-down company is going to be a sure winner. But by sifting through the pile, we're able to find the companies can deliver without being overvalued. Best regards, Whitney
Editor's note: Whitney is sounding the alarm on an upcoming regulation rule that could jeopardize your portfolio. And it's likely that its impact won't stop at just SpaceX. So if you've invested in an ETF or retirement account, you must hear what he has to say. Before July 6, learn what you need to know to protect your wealth. |
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