Today, in the digital world, the enthusiasm about Artificial Intelligence has increased so much that people are not able to see the hidden risks behind it. The current brilliance of AI is not as solid as it seems. When this bubble bursts, it could be bigger than the Nortel-Cisco crisis of 2000. This is what famous investor Michael Burry has to say. If you do not know about Bury, then let us tell you that Michael James Bury is an American investor and hedge fund manager, who made huge profits by betting against the American housing market at the right time before the 2008 financial crisis. Doctor-turned-investor Bari’s deep analytical ability and unusual thinking are considered his strengths. Through Skyon Capital, he made millions of dollars for his investors. Now he has warned about AI bubble.
Michael Burry said that the huge investment being made in companies like Nvidia and Palantir has become a dangerous bubble. If it explodes, it could be more serious than the Nortel and Cisco disaster of 2000.
The market is not able to understand how big the fall will be.
Investor Michael Burry, in conversation with author Michael Lewis, said that the current boom in the name of Artificial Intelligence is not a simple enthusiasm, but an increasing risk. His words were, “The market is not understanding how big the AI bubble is and how deep the fall will be.” According to Bari, Palantir and Nvidia stand at the center of this surge. Just like Nortel and Cisco were in the year 2000, but this time the situation is even weaker than before.
Prices based on expectations and hype
Bari says that today companies increase the price of their shares just by announcing that they are investing capital in AI. “If you say you spend one dollar of capex on AI, your market cap increases by three dollars,” he jokes. That means the price is based more on expectations and hype than actual performance.
According to him, both Nvidia and Palantir are “among the luckiest companies in the world.” Nvidia first benefited from the wave of crypto mining and now generative AI. At the same time, after the arrival of ChatGPT, Palantir started calling many of its old services as AI solutions, and many companies started buying the most expensive AI services to look modern.
But according to Bury, Palantir’s financial position is not as strong as it appears. He says that a large part of the company’s money goes into stock-based compensation. That means, the visible earnings are actually spent on giving shares to the employees. Not only this, the company has to continuously buyback its own shares, so that the shortfall caused by the shares given to the employees can be made up. Bari also says, “I have never seen five billionaires emerge from an income of four billion dollars.”
Fewer people paying for AI
The issue is not just this. Bari says that the infrastructure that was created in the early stages of the Internet gave birth to e-commerce, social networks and many new industries. But most people use today’s AI tools for free, and very few people are willing to pay. He clearly says, “Most people get what they want at a free level… there are few people who pay.” This shows that the real range of earnings is very small.
His biggest concern is about the market structure. Today more than half of the investments are made through passive investing. This means that when the market comes down, there will be very few active investors buying. “When the collapse begins… this time the entire structure could come down at once,” Bari warns.
Benefit is being taken by throwing dust in the eyes
Bury also points out that companies are making their profits look good by overstating the age of graphics processing units (GPUs) and servers, when in reality these machines become obsolete very quickly. This type of accounting hides the real expenses. For all these reasons, they believe that when this era of AI breaks, it will cause more damage than the Nortel-Cisco crash.
Bury also confirmed that he took two-year put options on Palantir and Nvidia, which were exercised at very distant prices. Reports described it as a $1 billion deal, but they clarified that the actual investment was less, the larger number appearing due to notional value. Despite this his confidence is clear. As he said, “I thought two years would be enough.”
