Business Insider Michael Burry says investors who are hoping for a world of both limitless demand for AI chips and less spending by AI hyperscalers need a reality check.
- Michael Burry sees a major contradiction in the AI trade's bull case.
- He wrote that the best case scenario looks different for
Nvidiacompared to the AI hyperscalers. - While AI bulls see a best-of-both-worlds scenario, Burry argues such an outcome isn't possible. Michael Burry says bullish AI investors need to get real about what the future holds.
"The Big Short" investor announced last week that he's placed new bets against Nvidia and Tesla, as well as the iShares Semiconductor ETF (SOXX). He followed that up with a July 9 post on his Substack in which he broke down a contradiction he sees at the heart of the AI trade.
"The hyperscalers are promising permanent demand growth and temporary spending over 3-4 years all in the same breath," Burry wrote. "Nvidia needs the permanent demand growth. Hyperscalers need the buildout to be largely over in 3-4 years."
Burry said that Nvidia needs an essentially endless cycle of demand for its high-priced AI chips. In his view, there is a divergence coming between the chipmaker's current and future revenue.
"Nvidia's revenue growth is mostly real but the resolution of the
bottleneck, any which way or when it happens, reduces the recurrence rate of Nvidia's revenue, which will also take down the scarcity premium and hence margin for both new and old chips," Burry said.
Extending this demand cycle could be what helps Nvidia, in Burry's view. However, the best thing for hyperscalers like Meta, Amazon, and Microsoft, would be a much different scenario in which their cycle of colossal capex spending wraps up in a few years.
Burry noted that the companies purchasing Nvidia's chips are facing challenges. AI capex has soared in recent months amid the data center boom, and free cash flow has crumbled.
The question of how long they can go without seeing a return on such massive investment has sparked concern among investors, which Burry said he shares.
"The hyperscalers are seeing free cash flow fall toward zero already," he said. "The reported profit is there, courtesy of long depreciation schedules in part, but the owners' earnings are not."
Burry also said that AI bulls see a scenario in which a "third door" opens, leading to a market which sees infinite demand and curtailed spending, an outcome that benefits both hardware makers and capex spenders. Burry sees no such path ahead.
"There is no third door," he said.
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