It’s the story of so many stock market manias: A transformative technology juices a few companies, a bunch of more questionable outfits follow in their wake and Wall Street buys it all. Then time sorts out what’s real from fake.

Artificial intelligence, which has fuelled the latest bounce in the S&P 500 Index as everything remotely attached to the technology sees its stock price soar, is the latest example. And it’s reached the point where some investors are betting against a few of those AI darlings, like Super Micro Computer Inc and Lumen Technologies Inc, whose shares were up more than 250% at various points this year.

“We’re separating winners and losers,” said Mahoney Asset Management CEO Ken Mahoney.

Super Micro, Lumen and Symbotic Inc stumbled in the final days of August after being targeted by bearish research reports questioning their valuations. Silicon Valley server maker Super Micro began last week with a market capitalisation of around US$36 billion and ended around US$26 billion after a report from activist short seller Hindenburg Research on Tuesday pointed to “glaring accounting red flags” among other issues and kickstarted a corporate governance fiasco.

None of this is to say that AI won’t help transform the economy and spawn opportunities for hundreds of businesses the way Jamie Dimon, head of JPMorgan Chase & Co, suggested in April. But it isn’t stock market magic. And if history holds, there will be plenty of bumps on the road to success.

The angry reaction to Nvidia Corp’s earnings last week shows how tenuous things can get. The chipmaking giant beat analysts’ estimates and the stock fell 6.4%. Why? Because after watching the shares soar more than 700% since the start of 2023, investors have grown accustomed to Nvidia not just beating expectations but destroying them. And with its equity “priced for perfection,” Mahoney said, the US$3 trillion company was primed for a US$200 billion selloff. 

Still, Mahoney was quick to point out that Nvidia and the other big AI plays in the Magnificent Seven have been largely consistent with results and growth. That’s what sets them apart from the likes of Super Micro, which have “been sporadic”, he said.

That unpredictability combined with the rapid ascent of their stock prices makes them particularly prone to shocks from short sellers’ accusations. Roughly 24 hours after Hindenburg’s report on Super Micro hit, the San Jose, California-based company said it needed more time to assess internal controls over financial reporting. That’s why investors unloaded the shares.

Tuesday also was tough for Lumen Technologies, as Kerrisale Capital announced on the social media platform X that it was short the stock due to “worsening sales and margin trends amid a staggering debt burden.” The fibre networking company’s shares, which took off in July to rise from around US$1 apiece to more than US$6.50 in a matter of weeks, tumbled on the news and are now trading for around US$5.

Meanwhile, SoftBank Group Corp-backed Symbotic has lost 23% of its value in less than two weeks after a short report was circulated by investors maintaining that drone footage shows nothing happening at some of the company’s sites. The warehouse robotics firm has positioned itself as an AI beneficiary, striking a joint venture deal with SoftBank to buy its AI-powered systems last July when its shares were trading for more than twice Friday’s closing price.

A spokesperson for Super Micro told Bloomberg News that the company “does not comment on rumours and speculation,” while a Lumen representative said the growth of AI will increase demand for its fibre network. Symbotic did not reply to email requests seeking comment.

As for Hindenburg, it struck again on Thursday with a report accusing iLearningEngines Holdings Inc, which describes itself as an “applied AI platform for learning and work automation,” as faking its financial figures. Shares plunged 53%, while the company said in a release that it believes the report had misleading statements.

These are the kinds of swings that happen when markets become fixated with a new technology, from the invention of radio to the development of the internet. 

“The stock market always has a way of moving too far, too fast and then going through a period of digestion,” John Belton, portfolio manager at Gabelli Funds, said in an interview. “For a lot of these companies, we’re in a healthy period of digestion.” 

The benefits of AI are still being worked out. Valuations of privately held artificial intelligence companies are soaring, as seen in OpenAI’s latest funding round. And that’s spilling over into the stock market, where there are only so many publicly traded companies that offer exposure to the technology. The result is the kind of momentum that fuels a frenzy and valuations soar.

This isn’t the first time investors have targeted companies whose share prices soared on AI-fuelled expectations. In March, Hindenburg bet against data centre owner Equinix Inc. And in July, Culper Research questioned Bitcoin miner Iris Energy’s AI aspirations. 

So seen in that light, this summer’s pullback in the stock prices of some former AI high-flyers and the questioning of valuations of companies tied to the technology indicate that investors are starting to wonder how much this is all ultimately going to be worth - and which companies are going to last long enough to see it.

“We don’t know how big this is going to be and that type of market backdrop can lend itself to little pockets of excess forming,” Belton said. “We’re still in a part of the generative AI investment cycle where it’s hard to know the shape of the cycle in the longer term.”

  - Bloomberg