Hedge fund manager Dan Niles sees this week’s sell-off in tech stocks as evidence that the industry is in serious trouble. Niles sees the market’s reaction to Google parent Alphabet’s quarterly earnings as evidence that investors are getting impatient. The stock fell 5% on Wednesday. “The market’s reaction to Google seems to suggest that people are finally waking up to reality and saying, ‘Yes, at some point I want to see all this revenue.'” [artificial intelligence] “We’re probably overbuilt right now,” the Niles Investment Management founder and portfolio manager told CNBC’s “Fast Money” on Wednesday. On July 11, Niles warned at X that earnings season could expose big risks for mega-cap tech trades. He was particularly concerned about the Magnificent Seven stocks, which include Tesla, Nvidia, Alphabet, Meta Platforms, Microsoft, Apple and Amazon. The index was down about 6% on Wednesday. The biggest fallers included Nvidia, the mega-cap semiconductor stock that was down about 7% on Wednesday. The company is scheduled to report quarterly earnings on Aug. 28. “We’re probably overbuilt right now,” Niles said. [Tuesday] “AI spending will slow, but Nvidia won’t be down quarter-over-quarter for years, just like Cisco didn’t have a quarter-over-quarter decline for years while they were ramping up their technology,” Niles said. “Now I actually wonder if we’ll see a quarter-over-quarter decline at some point next year, because these big tech companies are admitting that they’re probably overbuilding right now.” Niles, a former Wall Street semiconductor and computer hardware analyst, also sees risks stemming from a China bubble. “If you’re saying there’s a bubble because China is over-ordering everything under the earth and there could be a 100% complete change of regime, that’s a reasonable thing for China to do,” Niles added. “And then… [capital] Most of the equipment makers that are reporting have close to 50% of their revenue coming from China. So, next year, we’re going to see capital spending fall off, and it’s going to be scary.” Niles said the sector doesn’t have enough downside yet to add exposure. “On the short side, I covered one of my shorts today in Mag7, which fell hard,” he said. “But in general, I’m still looking more toward the short side.” Longer term, Niles thinks the bull case for mega-cap tech stocks is alive and well. “I think we’re still a couple of years away from this hitting a sustained peak, or whatever you want to call it,” Niles said. “So we’re going to have to weather this period just like we did with Cisco, which had three scary drawdowns before it went up 4,000%.” Disclosure: I own Apple, Nvidia, and Amazon. Disclaimer
Hedge fund manager Dan Niles
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