I have written about AI and Coreweave a lot in the last few days. And I have received a lot of replies, almost universally bearish, and from a lot of managers and investors that I respect. And to be honest, if gives me pause. So I thought I should give some more detail on how I think. I am not a short term trader. When I go bearish on something, I expect it to fall for quite some time. I look at both demand and supply, and basically figure out when profits in an industry are going to go to zero. So for me a perfect bear case is when demand looks to be falling just as supply is coming on line.
A good example has been iron ore in 2011, or oil in 2013, or restaurant franchises in recent years. My problem with being bearish AI, is that there is no clear sign that demand is falling. If anything, the opposite is true. The other bear argument is that there is excess capacity. Again, if this was true, pricing would be weakening, and I cannot find that. One area, that does look interesting is that financing is getting scarce. And I can get fully on board with that idea. The problem of course is that the underlying collateral has value, so it makes for a tricky short.
Why do I mention this? Well short selling is dangerous. And it is particularly dangerous when consensus. For years, the market was bearish on Tesla. Social media was full of all the financial shenanigans that Elon Musk got up to, and how he needed capital. What happened? Tesla became the most shorted stock in the S&P 500 before rising 3000%.
What happened to all those Tesla bears? Well hard to believe, but most of them write Substacks now.
Many people were also bearish on crypto and bitcoin, for very sensible reasons. And we all know what happened there.
So when I think something might be a short - I like it to have three qualities.
1 - none to little short interest.
2 - almost no bearish consensus.
3 - a committed share holder base.
4 - share price weakness in suppliers or customers
And I avoid the following
1 - a high cost to borrow
2 - “never short a dream”
3 - key customers or suppliers shares prices are surging.
Now just because Coreweave does not meet my standards as a short, does not mean its not a short. But what I can tell you for free in my career, is that if it is not a short (that is if it goes up instead of down) it could go up a LONG way. That is the risk reward is poor. I have no position in Coreweave, I am just intrigued by it.
