Michael Burry has intensified his worries about an AI bubble, likening one prominent tech firm today to Cisco during the dot-com crash of the late 1990s.
TL;DR
- Michael Burry warns of an AI bubble, comparing Nvidia to Cisco during the dot-com crash.
- He sees Nvidia as the central company in the AI surge, similar to Cisco's role in the past.
- Burry's hedge fund, Scion Asset Management, bought put options on Nvidia and Palantir.
- Nvidia's massive valuation and investments raise concerns about a circular financing loop.
In his initial Substack post titled “The Cardinal Sign of a Bubble: Supply-Side Gluttony”, released on Sunday, Burry, renowned for accurately predicting the 2008 housing market crash, depicted in the 2015 movie The Big Short,, labeled the AI surge a “glorious folly,”, specifically pointing to Nvidia as an indicator of when he anticipates the sector's bubble will deflate.
“Folly makes money. Creative destruction and manic folly are exactly why the U.S. Is the center of innovation in the world,” Burry said. “Companies are allowed to innovate themselves to death. And ever more spring up to do the same. Sometimes the new company is the same company on a pivot.”
Burry remarked that the tech sector was characterized by “highly profitable large caps, among which were the so-called ‘Four Horsemen’ of the era—Microsoft, Intel, Dell, and Cisco.” During the dot-com era. He also identified five publicly traded companies as the leading forces in the current AI surge: Microsoft, Google, Meta, Amazon, and Oracle.
Burry specifically identified Cisco as the company leading the charge during the dot-com bubble's collapse. This technology firm's shares experienced a remarkable 3,800% increase from 1995 to 2000, reaching a global market valuation of about $560 billion. However, the company's stock value drastically fell at the start of the new millennium, dropping over 80%.
Today, Burry argued, history is repeating itself with today’s AI boom: “And once again there is a Cisco at the center of it all, with the picks and shovels for all and the expansive vision to go with it,” Burry said. “Its name is Nvidia.”
Burry has published a flurry of X posts casting doubt on the ballooning valuations of AI companies, in particular Nvidia, which he has criticized over the actual longevity of its chips, as well as the chipmakers’ ability to sustain demand for its products. Earlier this month, Burry’s hedge fund Scion Asset Management bought more than $1 billion in put options—a contract that allows you to profit from an asset sold at a later date—on Nvidia and Palantir, according to regulatory filings. That’s before the investor quietly deregistered Scion just weeks later, effectively resigning from managing others’ money.
Scrutiny of Nvidia
Similar to Cisco’s record-breaking market cap 25 years ago, Nvidia has established itself as the world’s most valuable company today, worth roughly $5 trillion. The company’s swelling value has also concerned Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, who told Coins2Day in September she’s worried about the industry’s “Cisco moment” in the next 24 months.
She said the tech companies surrounding Nvidia are “starting to become interwoven,” with firms creating a circular financing loop. For example, Nvidia pledged to invest $100 million in OpenAI in September, and announced last week it will invest $10 billion into Anthropic. In return, Anthropic will invest $30 billion to scale its Claude AI model on Microsoft’s Nvidia-powered Azure cloud platform. The continuous investments have, in effect, created one giant blob of AI companies passing the same billions of dollars back and forth.
Nvidia, in response, has countered its doubters. The company announced another period of blockbuster earnings recently, marked by a 62% jump in income. Chief Financial Officer Colette Kress addressed Burry’s assertion regarding the lifespan of Nvidia’s components, stating during the financial report that the firm's technology endures and performs well due to its CUDA software platform.
CEO Jensen Huang downplayed worries about a bubble and circular funding during a Fox Business Network interview event on “The Claman Countdown,”, stating the company hasn't disbursed any funds thus far, and that planned investments will represent a “tiny percentage” of its income.
“We reinvented computing for the first time in 60, 70 years,” Huang said. “And so all of the computers that have been installed around the world is being modernized to accelerated computing and video GPUs and to artificial intelligence. And so this build-out is going to last us many years to come.”
Nvidia did not immediately respond to Coins2Day’s request for comment.