Hedge fund manager Dan Niles sees this week’s tech sell-off as confirmation that the trade is in significant trouble. Niles sees the market’s response to Google parent Alphabet’s quarterly results as evidence that investors are getting impatient. Shares fell 5% on Wednesday. “The way the market reacted to Google tells me that people are finally starting to wake up to the reality: ‘Yes, at some point we want to see revenue for all of this.'” [artificial intelligence] “We need to spend more,” the founder and portfolio manager of Niles Investment Management told CNBC’s “Fast Money” on Wednesday. On July 11, Niles warned on X that earnings season could expose big risks within the megacap technology trade. He was particularly anxious about stocks within the “Magnificent Seven,” which include Tesla, Nvidia, Alphabet, Meta Platforms, Microsoft, Apple and Amazon. The index plunged nearly 6% on Wednesday. Among the most important losers was Nvidia. The megacap semiconductor stock lost nearly 7% on Wednesday. The company is scheduled to report quarterly results on August 28. ‘There’s probably an excessive amount of constructing happening at once’ “My assumption before the release was that shares of the megacap semiconductor stocks plunged nearly 7% on Wednesday. [Tuesday] was that we’re going to see a slowdown in AI spending, but Nvidia isn’t going to see a down quarter for many years, just like Cisco didn’t see one for many years while building technology,” Niles said. “Now I’m actually wondering if we’re going to see a down quarter sometime next year because these big, massive tech companies are admitting that they’re probably building too much right now.” Niles, a former semiconductor and computer hardware analyst on Wall Street, also sees risks posed by exuberance in China. “If you say there’s a bubble because China is over-ordering everything underground before we potentially have a change in government, that’s absolutely 100%. That’s the most reasonable thing for China to do,” Niles added. “And if you look at some of the [capital] China is almost 50% of sales for the equipment companies that are reporting their numbers. So at some point next year, there’s going to be a collapse in cap equipment, and that’s going to be terrible because of that.” Niles said there’s not enough downside in that area yet so as to add exposure. “On the short side, we covered one of our Mag Seven shorts today that got crushed,” he said. “But generally speaking, we’re still looking more on the short side.” Longer term, Niles believes the bull case for megacap tech stocks is unbroken. “I think we’ve got several years before this reaches a sustained peak or whatever you want to call it,” Niles said. “So you just have to get through that period, just like you had to get through three horrific declines in Cisco on the way to a 4,000% stock price run.” Disclosure: Owns Apple, Nvidia, Amazon. Disclaimer
