The ongoing buildout of AI infrastructure is significantly influencing both the markets and the economy. Recently, two neocloud providers, CoreWeave, Inc. (CRWV) and Nebius N.V. (NBIS), reported quarterly results that exceeded market expectations, leading to a surge in their stock prices. Notably, CoreWeave reported a staggering negative free cash flow of $5.7 billion in Q2, which is indicative of its rapid revenue growth but also raises concerns about sustainability.
This trend of negative free cash flow isn’t unique to just these companies; Oracle (ORCL) and Alphabet (GOOG) also reported substantial negatives in their recent earnings. Specifically, Alphabet faced nearly $6 billion in negative free cash flow, marking the first such occurrence in over 20 years. Additionally, Oracle recorded a striking $24 billion in negative free cash flow for the fiscal year ending in June.
Such developments raise questions about the long-term viability of the enormous investments being made, particularly since the combined spending of major tech players exceeds historical infrastructural investments like the U.S. interstate system. As the market anticipates positive returns on these vast expenditures, skepticism remains, especially considering past technology shifts, which have typically resulted in boom-and-bust cycles.
In my portfolio, I have a couple of AI-related stocks that I’ve highlighted recently. One is eRock, Inc. (EROC), which has seen over a 20% increase since I last discussed it. The company reported strong earnings, with its order backlog skyrocketing to a record $1.7 billion. Another stock is Hewlett Packard (HPE), which I recently initiated a position in due to its favorable valuation and increasing AI demand. This stock has also risen nearly 20% since my last mention, buoyed by buy ratings from major financial firms.
Although I see potential in both stocks, I’m not rushing to chase their recent price increases. Instead, I plan to add to my holdings if either experiences a pullback of around 10%, utilizing covered call orders to enhance my position in an otherwise overbought market.
At the time of publication, I held long positions in EROC and HPE.
