An inside look at his analysis showing AI is a bubble

Michael Burry, the famed investor who accurately predicted the housing market crash of 2008, has now set his sights on a new target: artificial intelligence (AI). Despite deregistering his hedge-fund firm, Scion Asset Management, Burry remains actively investing and is doubling down on what he believes to be a major mispricing in the market.

At the heart of Burry’s new focus is Phil Clifton, Scion’s former associate portfolio manager, whose research forms the basis of their skepticism towards AI. Clifton argues that while the adoption of generative AI is on the rise, the economics behind the massive infrastructure buildout needed for the industry have yet to justify the costs.

In a farewell letter to Scion investors, Burry praised Clifton as “the most prodigious thinker” he’s ever encountered. Several of Clifton’s research notes obtained by CNBC outline Scion’s bearish stance on AI. According to Clifton, the investment world is expecting more economic value from AI technology than is likely to be delivered. Just because a technology is groundbreaking doesn’t necessarily mean it’s a sound business proposition.

Despite the widespread use of AI, Clifton points out that the economics on the demand side are relatively small. While companies like OpenAI are projected to generate significant revenue, the overall investment in AI infrastructure far exceeds the potential returns. This disparity raises concerns about the sustainability of the AI industry’s current trajectory.

Drawing parallels to the early-2000s telecom boom, where heavy investment in fiber-optic networks outpaced actual usage, Scion warns that the cloud giants may be overextending themselves with their AI infrastructure investments. If mass adoption of AI takes longer than expected, the economics of these massive data center deals could become unsustainable.

One company that has benefited greatly from AI spending is Nvidia, whose stock has surged alongside unprecedented GPU orders from cloud providers. However, Scion questions whether these customers will ever see economic returns on their investment in Nvidia’s technology.

Critics like Burry are also skeptical of Nvidia’s depreciation policy, which they claim artificially extends the lifespan of servers on the books. Nvidia defends its position, stating that its hardware remains productive for longer periods due to efficiencies driven by its CUDA software system.

Burry has launched a Substack newsletter to share his bearish thesis on AI, highlighting the potential risks of a bubble in the generative AI market. While the ultimate outcome remains uncertain, Burry’s cautious approach reflects his belief that the current enthusiasm for AI may be overblown.

In conclusion, Michael Burry’s pivot towards betting against the AI boom underscores the importance of careful analysis and skepticism in the face of rapidly evolving technologies. As the debate over the economic viability of AI continues, investors and industry stakeholders alike will need to navigate these uncertainties with caution.