Chaos and Mayhem – US Tech

Tian Xuan Zhou (Oliver)
Student, New European College – Munich

 

Knowing that I have two weeks to write about this really helps; this article is punching way above my weight. Who doesn’t want to cover US tech?

I would have mentioned in the writing last week that, in my opinion, US stock valuations are trading at crazy high expectations. By the time that week’s article has been released, Michael Burry, the investor made famous by “The Big Short” revealed their hand – put options^[1] with a notional value^[2] of about $187 million against Nvidia and $912 million against Palantir. However, do keep in mind that no strike price^[3] and expiration date was disclosed, how interesting. Following up on the news, Softbank revealed that it had sold its entire stake in Nvidia for $5.83 billion throughout October, also note that it is not the first time SoftBank has done this with Nvidia.

Could this be the kickstart to the correction that I was talking about last week?^[4] The main concern for Mr. Burry, was that the hyperscalers, the Metas, Microsofts and Amazons, are ramping up CapEx^[5] by purchasing Nvidia chips in 2-3 year product cycles. However the computing equipment using these chips will not outlast this cycle. Therefore their large assets, the semiconductor and the servers, may rapidly depreciate in value.

I do see this as a concern, as Mr. Burry estimated in 2026 to 2028 an estimated $176 Billion would have depreciated in large assets. Since stock prices trade a lot in future expectations and results, this would mean that valuations and current stock prices are highly inflated. But I just don’t see the knockout blow. Meta platforms alone have guided a forward CapEx of $70-72 billion for fiscal year 2025. This means even if they do not increase their CapEx until 2028, they would have covered the depreciation in large assets alone, and this is only Meta Platforms, just by themselves. Furthermore, who is to say that CapEx of these megacaps are not spent on the upkeep or updating these large assets?

By now, I have read a lot of articles about a potential AI bubble, and people comparing this to the dotcom bubble and that we should be expecting a crash. Haven’t we learnt enough from the dotcom bubble? Sure, I do think a correction is healthy but a crash? I don’t think so. And I certainly wouldn’t go as far as comparing it to the dotcom bubble, almost every aspect is different. Palantir and Nvidia, these are profitable, dominant megacaps with strong measurable cash flows. Vastly different to dumping money into non profitable startups during the dotcom bubble.

Notice at the start of the article and last week, I talk about crazy high expectations instead of mentioning anything about valuation. Don’t get me wrong I do think that valuation is high, just not the “crazy high” everyone is talking about, thus a correction is healthy in my opinion.

Oracle, for example, recorded its biggest single day gain since 1992, +35.95% after reporting a mammoth increase in cloud demand numbers – Q1 FY2026^[6] RPO^[7] of $455 Billion. This is +359% YoY. As of the 11th November, Oracle is trading at a P/E^[8] of ~55 times and P/B^[9] of ~28 times, are we to say that Oracle is overvalued? Take into account the RPO in 2026, this is not guaranteed cash or revenue as Oracle must still deliver those services requiring Billions in CapEx. Oracle states – ~45% of RPO will be recognised within the next 12 months. This is ~200 Billion^[10] in potential revenue within the next 12 months. Assuming that Oracle’s current margins hold, and my amazing and reliable mathematics skills and calculations, at a forward EPS 20%^[11] higher than consensus. We now arrive at forward P/E and P/B ratios of ~36 times and ~22 times respectively, far more reasonable than the ~55 times and ~28 times mentioned above.

Palantir is another interesting case. After being once again profitable since the 1Q of 2023, growth has since not looked back. The backbone for this growth is built around government and defense contracts, especially with the CIA and homeland security (Note a lot of activity between the two parties remains classified). More importantly these are high margin recurring deals providing predictable and sustainable revenue, which is highly valuable for the firm. Not to mention their reach in commercial contracts. Can I argue the same as I did for Oracle? No, but I can understand the huge potential in growth. There is yet a competitor that has proven that they can potentially compete for similar contracts. But this is unconvincing, as the stock price is still trading at dizzyingly high valuations according to our metrics.

I think if anything, Alex Karp, CEO and Co founder of Palantir Technologies, is one of the reasons. Deeply involved in the operations, strategy and public relationships of the firm. He has been able to prove time and time again to be able to beat top end guidance, especially for revenue growth and contract wins. If anything I believe his ability and leadership to execute and win over high stake deals repeatedly in the future no matter government defense contracts or commercial contracts. After all, we as investors invest in a firm to do well, and what better than a firm with such an impressive (maybe not ethically) CEO at the helm. Therefore, even if I am concerned about their valuations, I sure as well would not want to bet against them.

For me it is completely reasonable for some of these stocks to be trading at these levels (I have mentioned before investors are now paying more than 40 times^[12] the underlying for the S&P 500), especially when there is measurable data. Such as Oracle’s Q1 FY2026 RPO. I somewhat see this pullback as a buying opportunity.

My ideas on positioning consist of a long position in megacaps such as PLTR or META that has underperformed in the past weeks or so and shorting a high beta ETF (such as SPX500HBETA^[13]) as a hedge –  if this is in fact short term pressure on megacaps and tech, the megacap will outperform the markets in the rebound, when market sentiment is strong, cover the short. Likewise, if all underperform, the short then becomes a structural/momentum trade, high weighted components such as the megacaps drag down the index and since the high beta is structurally weak, I’d imagine they would experience huge selling pressure with a lot of rotation out, if not already, out of these names. I ALMOST want to treat this as a beta neutral hedge^[14]. (Morgan Stanley estimates that leveraged ETFs currently generate approximately $10 billion in short gamma^[15] exposure for every 1% drop in the S&P 500 Index!)

But tread carefully, since information is as accessible as ever, I think it is safe to assume that an increasing amount of institution positions and retail positions are overlapping because of the information and data, making positions extremely concentrated. I also tend to be mindful, maybe even undermining historic data and comparisons, historical analogies will only go so far, and I think the market is heading into a lot of uncharted territory. Can we break the trend? Only time will tell.

*As of finishing this draft, 14th Nov, December rate cut seems to now be a toss up. Weakening job market data seems to suggest a cut, however inflation numbers suggest otherwise. US markets closed lower last night, I want to assume that since there was a fair amount priced in on a December cut, this is what caused the underperformance instead of tech. I think any clarity on the Fed’s position will be important, perhaps a cut kickstarts a recovery in the tech with some clarity.

Reflection – I think it is important going forward that I also reflect on my work in the previous weeks, to confidently say that I was right or have the humility and courage to also say I got it wrong. Although it is only week 3 and there may not be a lot to reflect on yet. With that being said, the Quantum Computing stock of my choice (for now) QUBT US has just filed their first positive EPS of 0.01 (still making an operating loss), beating consensus! After weeks of underperformance that I think were dragged down by the AI tech concerns, I would be looking at entry points as I will imagine that alongside speculations of growth, short term increases may be dragged up by (larger quantities of) block orders, shares gained 8.49% on the day session 17th November.

^[1] A contract allowing traders to sell the stock, though not obligated, at a given strike price with an expiration date

^[2] Value of the underlying asset in a derivatives trade, in this context the put options

^[3] The fixed price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying security.

^[4] As of writing this section, 11th November, CNBC headline “Dow rises 500 points, but the Nasdaq is lower as investors rotate out of technology stocks”

^[5] Capital Expenditure

^[6] First quarter forward 2026

^[7] Remaining performance obligations, shows the money a company is contractually guaranteed to receive in the future from current customers

^[8] A comparison of a firm’s market capitalisation to its earnings

^[9] A comparison of a firm’s market capitalisation to its book value

^[10] This number has to be included in the forward consensus revenue guidance of $67 Billion otherwise ratios would look ridiculously low

^[11] Revenue +15% and at least +5% upside surprise if the full 45% of the RPO is fulfilled assuming markets are already priced in at any level, taking the very low end of my range

^[12] Using CAPE ratio

^[13] S&P 500 High Beta Index, tracks the 100 tickers from the S&P 500 with the highest beta over a trailing period

^[14] Strategy aimed at neutralising market risk by balancing positive and negative beta values within a portfolio/trade

^[15] Rate of change of an option’s delta, delta being risk metric that estimates the change in the price of a derivative, such as an options contract