The Hidden Reason AI Stocks Just Crashed

Public.com presents The Rundown, your daily market update in 10 minutes. My name is Zaid Admani, and today is Friday, November 6th. In today's episode, we'll break down why stocks got... crushed yesterday and why the AI trade was at the center of it all. We'll also take a look at this morning's jobs report and what it could mean for the Fed. Plus, we got another round of rapid fire earnings recap, including Airbnb, Cloudflare and DraftKings. Then stick around to the end of the show to find out how big the global anime market has become. We got a great show for you today. Let's go. Well, guys, the post-election rally didn't last very long. Stocks got absolutely wrecked yesterday. The S&P 500 fell about 4.4 percent and the Nasdaq dropped by 5.5 percent. Both indices having their worst day since the tariff sell-off from last April. I mean, the Nasdaq itself lost an estimated $2.5 trillion in market value, which is the biggest one-day drop in its history in dollar terms. And the index is now in a correction, meaning that it's fallen more than 10% from its recent high. But, you know, this wasn't just a tech thing. All 11 sectors of the S&P were down yesterday. And all 30 stocks in the Dow fell yesterday as well. So what happened? What caused this massive sell-off? Well, I think there are two main things. The first is that the market is just continuing to digest the midterm results and what a democratic sweep could mean for new data center construction. New data center construction and AI investments have been the main driver of economic growth over the last couple of years. And with some of these governors that got elected running on anti-data center campaigns. That could slow down. I mean, that's why AI stocks got absolutely destroyed yesterday. The semiconductor index crashed 12% for its worst day since March of 2020. The index is now down nearly. Some other notable losses yesterday include AMD, which dropped 17%, and SanDisk, which dropped 22%. And even NVIDIA fell more than 9% yesterday, wiping out over $440 billion in market value in a single day. In fact, NVIDIA stock is now in the red. Now, on yesterday's show, I did talk about how a slower AI buildup might be good for the hyperscalers because it would give them an excuse to ease up on spending. But I guess the market isn't seeing it that way anymore. Even the hyperscalers were down yesterday, although they did hold up better than many of the companies supplying. But look, I don't think yesterday was just about the election. I think investors were already nervous about the amount of money being poured into AI and the debt used to finance some of these projects, not to mention the earnings reports from these big tech companies has been somewhat disappointing. And, you know, there are some on Wall Street that think that some of the selling on yesterday might have been forced. There are many traders that have used borrowed money to make bullish bets on AI stocks. And when prices start to fall, those positions come under pressure. And some of those traders are forced to sell their position. to pay back their loans, which causes price to drop even further. You know, it's like a downward debt spiral. We kind of saw this back in July as well. So we'll see if stocks bounce back like they did earlier this year. I do think that politics could lead to some headwinds, but I don't think it's going to be as bad as some people are fearing. I think the bigger concern is all the debt in the system. But look, the valuation of some of these AI names is looking a lot more attractive today than they did a few weeks ago. Now, I'm recording this in the pre-market, and the market is starting to bounce back. The NASDAQ is up more than 1% at the time of this recording. So we'll see if we get another dramatic move today after this episode gets posted. The timing can be tricky at times, especially when you're dealing with a volatile market like we are right now. But look, as always, we'll stay. on top of everything. So definitely get subscribed to the podcast if you haven't already and tune in every day to stay in the loop. Let's run through some headlines starting with the jobs report. We just got the October jobs report this morning and oh my God, the economy added 165. jobs for the month of October. Economists were expecting closer to 59,000 jobs. So this report tripled what was expected and it beat every single forecast on Wall Street. And I think more importantly, the August and September numbers were revised higher as well by a combined 84,000 jobs and the unemployment rate ticked down from 4.2% to 4.1%. So again, this was a very strong jobs report. As for where the jobs came from, professional and business services added 70,000 jobs, healthcare added 42,000 jobs, and transportation and warehousing added 25,000 jobs. So, you know, after all the headlines about companies cutting jobs and AI replacing workers, This report was a reminder that the overall jobs market is doing just fine. I guess the one weak spot, though, was that wages still aren't keeping up with inflation. Average hourly earnings rose 0.4% compared to September, and wages were up 3.1% from a year ago. I guess the one weak spot from the report was that wages still aren't keeping up with inflation. Average hourly earnings rose 0.4% from September and were up 3.1% from a year ago. This is now the seventh month in a row where wages grew slower than inflation. People are still finding jobs, but their paychecks aren't going as far as they used to. Now, the part the market really cares about is what this means for the Fed. You know, a strong labor market gives the Federal Reserve more room to raise interest rates to bring down inflation. According to the prediction market on public dot com, traders now see a 77 percent chance of a rate hike at the December meeting. Which is up from the 70% chance yesterday. You know, typically good news like this would be bad for the stock market because of a higher odds of a rate hike. But as I'm recording this, both the S&P and NASDAQ are in the green in the pre-market. So we could be in for a nice bounce back today after yesterday's carnage. Let's Let's talk about some stocks. And once again, we're going rapid fire with a ton of earnings. get First up, Cloudflare is ripping this morning after the internet security company posted their fastest sales growth in nearly four years. started. Cloudflare sits in front of millions of websites to keep them from being attacked by bots. Which is becoming even more important today in the world of AI agents. Third quarter revenue jumped 39% to $782 million, which came in way ahead of estimates. And they raised their full year sales forecast as well. Now, Cloudflare stock did drop 8% on Thursday with the rest of the market selling off. But then they dropped this monster earnings report after the bell and proved that not everything AI related is broken. As a result, shares are up around $5. 15% this morning at the time of this recording. I've said this before, but I think the cybersecurity space is going to be a hot sector to watch over the next few months. Sticking with AI, let's talk about Iron. Iron is a former Bitcoin miner now turned Neo Cloud, and their earnings were a mixed bag. Revenues jumped 66% from last quarter to $228 million, beating estimates. And backlog hit over $20 billion. The markets like the results shares are up around 20% this morning at the time of this recording. But keep in mind, Iron's stock did drop more than 50% over the past month. What's funny is that Iron's co-CEO says that there's a disconnect between what the stock market is pricing in and what customers are actually asking for. And that is exactly what I'd say too after my stock fell 50% in a month. Now, one thing to note, Microsoft did ask Iron to redesign part of a big data center building in Texas. So the company says that more than $4 billion in annual revenue that was supposed to start this year will get pushed to January, maybe even February, but the market kind of looked past that. Next up, let's talk Airbnb. Shares are surging right now after the company reported its best quarter in years. Revenues grew 19% to $4.87 billion. That was the fastest growth in more than three years, and it beat even the highest estimates on Wall Street. Not to mention their Knight's book jumped by 16%. And here in North America, bookings grew at the fastest pace in four years. So it was a monstrous quarter for the company. Airbnb also raised their full year forecast for the third time this year and announced a $12 billion share buyback program. You know, one thing that Airbnb is successfully doing is moving beyond just home rentals. They now offer thousands of boutique and independent hotels on their platform, along with services like... Car rentals and even grocery delivery. I think that's a really smart move. They're essentially trying to become like an Expedia and not just a home rental company. The market really liked what they heard. Shares are up around 13% this morning at the time of this recording. Now, on the flip side, let's talk Lyft. Lyft's shares are dropping this morning after the ride-sharing company reported earnings. You know, on the surface, it looked like a record quarter. Rides and riders both hit all-time highs. And bookings grew by 17%. The problem, though, was that Lyft posted a surprise loss for the quarter because of a $118 million settlement over how they classified drivers in California. Now, this is just a one-time hit to the company's books. Without it, profits would have beaten expectations. Lyft is also rolling out a new DoorDash royalty bundle to take on Uber. But the market still wasn't happy with the numbers, and shares are down around 7% this morning. At the time of this recording. And then finally, there is DraftKings. Their stock is getting crushed this morning after reporting earnings. Revenues came in at $1.33 billion. That missed estimates. And their loss in the quarter was bigger than expected. Not to mention the company also cut their full year revenue forecast as well. So it was an ugly quarter. And the main reason for it was. prediction markets. DraftKings has lost some business to prediction markets like CalSheet and PolyMarket, and they've responded by launching their own prediction market. The company said that more than 1.6 million people have signed up for their prediction market, but DraftKings is also spending a ton of money on marketing to acquire those customers, which is making investors nervous. To put it another way, DraftKings is betting the house on prediction markets, and it hasn't paid off so far. As a result, DraftKings stock is down around 20% this morning at the time of this recording. Let's wrap the show with a fun fact. The global market for anime reached a record $28.2 billion last year. That's up almost 16% from the year before. And that number accounts everything, including streaming, movies, merch, music, live events. And what's interesting is that most of that spending is now happening. Outside of Japan, the overseas market reached about $16 billion last year, accounting for 57% of the total sales. Now, overseas spending on anime passed Japan for the first time in 2023, and that gap has gotten bigger every year since. You know, I feel like when I was a kid, anime was still very niche, but now it's become very mainstream. For example, nine of the 20 TV shows with the most user votes on IMDb are anime shows, not to mention the anime streaming service Crunchyroll, is very popular. But here's the thing. Japanese companies actually making the shows. aren't seeing much of that money. The animation studios brought in just about $3.2 billion last year. You know, part of the reason these studios aren't making as much money as they should is that they don't deal directly with the overseas partners. So that money gets passed around between all the middlemen before it reaches back to the studios in Japan. Now, the Japanese government is leaning into the anime phenomenon. They want anime exports to hit $38 billion by 2033. And you know, You know, if these studios ever cut out the middleman and start taking a bigger cut, I mean, the upside could be massive. Well, all right, guys, that's the rundown for today. That's the rundown for this week. And again, what a week it was. Hope you guys have been enjoying the episodes. And I want to thank everyone again that's taken the time to comment and vote in the Spotify polls. You know, all that engagement really does help us out and it helps other people find the show. Thank you guys again for listening, watching and commenting. Shout out to Mike and V for all the work behind the scenes. And we'll see you guys here for the next one.