There is a lot of talk of an artificial intelligence (AI) bubble. Echoes of 2000 are hard to ignore, with valuations reaching record highs and companies spending eye-watering amounts on infrastructure, racing to build as many colossal AI data centers as possible. While it is possible that we are not in a bubble and it truly is "different this time," it's not unreasonable to see the current trends as unsustainable.
If this is a bubble, there are a few stocks I wouldn't want to own. Here are two of the riskiest.
1. Oracle's reliance on OpenAI is not an asset
NYSE: ORCL
Key Data Points
The latest bout of bubble anxiety intensified after Oracle's (ORCL 1.87%) latest earnings report. While revenue and profits were up, the company is doubling down on its AI spending and borrowing heavily to fund it. Capital expenditures in the latest quarter jumped 200% year over year and were 50% higher than Wall Street expected. Management said it now expects to lay out roughly $50 billion in capex in its fiscal 2026, a massive increase from the $35 billion it had previously projected.
Oracle doesn't have the cash flow to fund that kind of buildout without leaning heavily on the debt markets. In September, the company raised $18 billion in one of the largest bond sales in tech sector history, and it is targeting even higher amounts in the coming year. Though the company itself has maintained an investment-grade credit rating, yields on its bonds have slipped into junk bond territory.
Oracle's five-year credit default swaps -- essentially insurance against the company failing to repay its debts -- have tripled in price in recent months and are now trading at levels not seen on Wall Street since the global financial crisis.
This is, in large part, because Oracle is borrowing so aggressively primarily to serve one customer: OpenAI. The creator of ChatGPT has committed to spending $300 billion over the next five years on Oracle's services.
That's an eye-popping number for a company that remains deeply unprofitable and whose competitive moat, in my opinion, has become more of a small stream at this point. OpenAI is still burning cash, and its annualized revenue is roughly a fifth of what it has committed to spend with Oracle each year. The reality is that OpenAI will need to continue to raise unprecedented amounts of capital to pay its bills.
2. CoreWeave is overleveraged
NASDAQ: CRWV
Key Data Points
While AI data center operator CoreWeave (CRWV 0.69%) has tripled its revenue over the past year, that growth is being financed with an enormous amount of expensive debt.
Including its lease obligations, CoreWeave carries about $15 billion of debt -- nearly four times its total revenue over the last 12 months. And this isn't cheap financing. The company paid $311 million last quarter just to cover the interest on its debt. Up nearly 200% year over year, its interest expense is now more than a fifth of its total revenue and roughly six times its gross profit.
And like Oracle, CoreWeave has an untenable degree of customer concentration. Nearly all of its revenues come from just a handful of customers, including Microsoft and other hyperscalers.
Image source: Getty Images.
If the AI bubble truly bursts, the implications for CoreWeave would be existential. But it wouldn't take a full-blown collapse for the company to be in serious trouble. Its key customers are also its competitors, and unless AI demand continues to expand at such a rapid pace that the hyperscalers remain unable to meet it with their own cloud infrastructure, Microsoft and its peers are likely to prefer to bring more of the workloads in-house and eliminate the middleman, CoreWeave.
And while the company does have some protection in the form of a $6.3 billion Nvidia backstop agreement, that cushion won't be enough to sustain it if demand for AI processing power cools meaningfully.
Honorable mentions
These are just two of the many stocks that could collapse if the AI bubble bursts -- other neocloud providers such as Nebius would plunge as well. So too would many of the AI hardware providers like Super Micro Computer, as well as a host of start-ups directly or indirectly related to AI that are trading at incredible valuations despite having little or no revenue, such as small modular nuclear reactor specialist Oklo and quantum computing pure plays Rigetti Computing and D-Wave Quantum.
No one can yet say for certain whether the AI sector really is in a bubble, but even the most confident bulls can't deny that the scale of spending in the space is unprecedented and that the fervor surrounding AI mirrors that of past bubbles.
If this is a bubble, just as with bubbles of the past, there will be companies that will not only survive its bursting, but thrive in the aftermath. CoreWeave and Oracle will not be among them.
