AI stocks took a beating yesterday as investors suddenly got cold feet about sky-high valuations in artificial intelligence companies. Palantir led the selloff with an 8% drop despite posting strong earnings Monday, while Nvidia also fell after "Big Short" investor Michael Burry revealed short positions against both AI darlings.
The AI boom hit a speed bump yesterday as investors suddenly questioned whether artificial intelligence companies are worth their astronomical valuations. Palantir bore the brunt of the selloff, plummeting 8% despite delivering a solid earnings report just Monday that should have sent shares soaring.
The data analytics company's forward price-to-earnings ratio of 254 has become a lightning rod for critics who argue AI stocks have gotten way ahead of themselves. For context, Nvidia - the undisputed king of AI chips - trades at a comparatively modest 35 times forward earnings. That's still rich by traditional standards, but it looks downright reasonable next to Palantir's nosebleed valuation.
Making matters worse, "Big Short" legend Michael Burry decided to pile on by revealing short positions against both Palantir and Nvidia in recent filings. Palantir CEO Alex Karp didn't take kindly to the move, calling it "bats--- crazy" and "market manipulation" during a heated appearance on CNBC's Squawk Box.
"The two companies he's shorting are the ones making all the money, which is super weird," Karp told CNBC, clearly rattled by Burry's bet against his company. The defensive tone suggests even AI executives are feeling pressure as the valuation party faces its first real test.
The contagion spread beyond Palantir to virtually every big tech name. All members of the so-called Magnificent Seven closed in the red except for Apple, which managed to eke out modest gains. Advanced Micro Devices got hit particularly hard after hours, dropping nearly 4% despite beating earnings and revenue expectations for Q3. The problem? AMD's margin guidance came in merely inline with estimates - apparently not good enough in this environment.
Super Micro Computer fared even worse, cratering 10% after the bell when the server maker missed on both revenue and earnings. The AI infrastructure play that had been riding high on datacenter demand suddenly looked vulnerable as investors scrutinized every metric.
Meanwhile, McDonald's provided a curious counterpoint to the tech carnage. The fast-food giant actually missed Wall Street's Q3 expectations on both revenue and earnings, reporting $7.08 billion in sales versus the $7.1 billion estimate. Yet shares rose 1% in premarket trading, suggesting investors are willing to forgive misses in more traditional sectors while holding AI companies to impossible standards.
CEO Chris Kempczinski called McDonald's results "a testament to our ability to deliver sustainable growth even in a challenging environment," highlighting 3.6% global same-store sales growth and 2.4% growth in the U.S. That kind of steady, unsexy growth suddenly looks appealing when AI darlings are trading at triple-digit multiples.
The broader question facing markets is whether this represents a healthy correction in overvalued AI names or the beginning of a more serious reckoning. With companies like Palantir trading at valuations that assume perfection for years to come, any sign of weakness could trigger sharp selloffs.
Adding to the uncertainty, job market data from Indeed showed openings hitting their lowest level in over four years last month. The Job Posting Index fell to 101.9 in October, its weakest reading since February 2021, raising questions about whether the economy can support current AI investment levels.
Yesterday's AI stock selloff serves as a wake-up call for investors who've been betting on perpetual growth in artificial intelligence companies. While the long-term potential remains enormous, valuations like Palantir's 254x forward P/E ratio suggest the market got ahead of itself. The real test will be whether companies can grow into their valuations fast enough to justify current prices, or if we're seeing the start of a more significant correction in the AI sector.
