Micron, SK hynix, Oracle, SpaceX, Google, Microsoft et al: AI’s dotcom deja vu

The AI debate has never been hotter and to say that the bears won the argument last month would be an understatement. Any doubts? Look up South Korean stock markets. The benchmark KOSPI Composite Index completed ‘a month to forget’ in July with a loss of 22 per cent. This is the third worst month in the index’s history, after the 27 per cent crash during the Asian financial crisis of October 1997 and 23 per cent plunge during the global financial crisis in October 2008. The country, which raced to a stock market capitalisation of $5.1 trillion as of June peak, has now seen $1.2 trillion of that wealth erode in a matter of weeks — a brief demonstration of the possible fallout if the AI trade were to go South across the globe.

The reason? Semiconductor stocks SK hynix and Samsung Electronics, which roughly account for 50 per cent of KOSPI companies’ market cap, slumped 20 per cent and 24 per cent respectively to intra-week lows (versus previous week close) — the very stocks that took the Korean stock market to record highs. .

That is not all. The rout was more intense in products such as single-stock leveraged ETFs. These are high risk funds that use derivatives to multiply the daily returns of an underlying stock. For instance, the CSOP SK Hynix Daily (2x) Leveraged Product ETF. This ETF will gain 2 per cent if SK hynix gains a per cent in a day and lose 2 per cent if the stock loses 1 per cent in a day. From its 52-week high on June 25, this ETF has lost over 78 per cent! Products like these and leveraged exposures to chip stocks have wiped out the portfolios of thousands of Korean investors. The situation is so dire that their finance minister apologised and admitted that such leveraged products were introduced without careful consideration.

While the impact has been most dramatic in South Korea, that is partly because its stock market had become, in effect, a concentrated bet on the AI trade. However, this unwind is no longer a Korea-only story and AI-theme stocks have been under pressure across markets.

We looked at 16 stocks which are front-runners of the AI theme. The list spans across hyperscalers, chip design (Nvidia, Broadcom), semiconductor manufacturing, neoclouds (CoreWeave, Nebius) and an AI investor/ financier in SoftBank. From their 52-week highs, these stocks are down 30 per cent on average (Chart 1). From the said peaks, they have erased investor wealth of about $6 trillion.

One of the starkest examples is Oracle. Last year, after it announced Q1 FY26 results in September, the stock zoomed about 43 per cent to a 52-week high, reflecting the recklessness in the AI mania. Today its correction of 62 per cent reflects the concerns building up.

Many of them are part of S&P 500, accounting for about 30 per cent of the index’s total market-cap and earnings. Between 2025 and 2026 (consensus estimate), the total net income of the index’s constituents is expected to move from $2.1 trillion to $2.9 trillion. Of this incremental income of about $840 billion in 2026, the said AI constituents account for one in three dollars — showing the weightage of these companies (Chart 2). Further, the index P/E multiple, based on CY25 net income is at 33x, which is a valuation that falls in the bubble territory. However, based on CY26 earnings estimates, the P/E cools to 23x. This expected earnings growth is the thin line dividing the debate between the bulls and the bears. If, unfortunately, these companies fail to meet earnings expectations, the index being in bubble territory, brings back memories of dot-com crash in which the S&P 500 corrected 50 per cent and the Nasdaq Composite 78 per cent from 2000 peak to troughs in late 2002.

So, does the market’s disappointment stem from earnings? Apparently not, as these companies have delivered earnings beat almost all the time in the last four quarters. The problem appears to be capex of astronomical proportions. Take Alphabet’s case. The company reported Q2 2026 earnings on July 22. Revenue grew 24 per cent year-on-year and operating income 30 per cent. Its cloud revenue (20 per cent of consolidated revenue) grew a staggering 82 per cent. Profit growth was muted relative to revenue growth at around 16 per cent after adjusting for one-offs. But what spooked the Street was the company raising full-year 2026 capex guidance from $195 billion to $205 billion. It also posted its first quarter of negative free cash flows. What added fuel to the fire was the management admitting that free cash flows will remain under pressure driven by capex and that capex will continue until it sees an ‘attractive return on that investment’.

Meta Platforms came up with Q2 results on Wednesday. Revenue beat expectations. But it barely ended up free cash flow positive with $784 million as against $8.5 billion in Q2 2025.

Amazon’s Q2 results on Thursday revealed that it continued to turn negative free cash flows for the quarter, similar to Q1. The company upped capex guidance from $200 billion to $220 billion for 2026.

The fact that companies are spending big time on capex and that free cash flows would drain is not a recent development, per se. It’s only now that the market is waking up to smell the coffee. As Keynes said, “Markets can remain irrational longer than you can remain solvent.”

The top hyperscalers, neoclouds, Meta Platforms alongside newly-listed SpaceX (xAI) are expected to incur capex of over $2.16 trillion in fiscals ending in 2026 and 2027, per Bloomberg consensus (Chart 3). This is around half the size of India’s economy! Also, rising capex has meant a clear downtrend in the fixed assets turnover ratio of hyperscalers (Chart 11).