Michael Burry Says AI Bubble Still Has Room to Grow, No Way to Tell When It Will Burst

Big Short investor Michael Burry, who famously shut down his hedge fund citing concerns over an AI bubble, has now stated that he does not know when this bubble might burst. In fact, he suggests there could be more room for it to expand further.

In his latest post on Substack, Burry explained that there is 'no way to time or predict' when the bubble might pop, especially since it could still grow significantly. 'Shorts are almost always short-term trades. Usually less than a year, maybe a couple of years at most,' he said. 'Not 5 years, not 10 years.'

He went on to remark that 'I believe today the stock market is in a phase that could become a blow off top of extreme magnitude on the upside, while at any time, maybe even today or tomorrow, making a generational top.' Burry's concern is that the market might be in the final stages of an extraordinary rally before a correction.

Burry pointed out what he described as 'supply-side gluttony,' highlighting the extensive expansion of data centres, surging orders for graphics processing units (GPUs), and multibillion-dollar commitments from tech firms—all seemingly driven by speculation rather than genuine end-user demand. He warned that investors are mistaking these activities for healthy supply-chain growth.

'Even when it finally tops, it will not be for any specific reason,' Burry wrote. 'Even if the reason is an AI buildout bubble popping, that will likely not be apparent until a year or two later.' He emphasised that, in such scenarios, the true cause of a downturn often remains hidden until well after the event.

He also advised caution to investors, stating: 'Mostly, it is prudent neither to short stocks nor to buy puts on stocks. Stocks that are obviously overvalued tend to have the most upward momentum, yet have puts that are very expensive.'

Burry Takes Aim at Nvidia

Burry indicated that much of the current AI hype is being driven by Nvidia CEO Jensen Huang's marketing efforts. In November, he shared charts on X, revealing the circulatory investment deals between Nvidia and other major tech giants.

He described Nvidia as 'a Cisco' in the AI bubble debate—drawing a parallel to Cisco's stock plunge of over 75% during the dot-com crash. Burry's charts also illustrated key market peaks: the Nasdaq index before the dot-com bubble burst, the S&P 500 before the housing crash, and the S&P Energy index before oil prices collapsed. All these peaks were followed by prolonged downturns that lasted years.

Burry warned that the current record highs in market indices could be signalling the peak of this capital cycle. While giants like Meta and Nvidia continue to ramp up investments in chips and data centres, the investor expressed concern that these might represent the final overextensions before a major market correction.

He concluded that if history is any guide, AI firms could continue their high levels of spending for another two years before a market crash could trigger a recession.

Nvidia Responds

In late November, Nvidia pushed back against some of Burry's claims in a note to Wall Street analysts. The chipmaker focused on Burry's X post, which claimed Nvidia's stock-based compensation had impacted shareholder value, 'reducing owners' earnings by 50%.'

Nvidia clarified that it had repurchased $91 billion (£67.9 billion) worth of shares since 2018, not $112.5 billion (£84 billion) as Burry indicated. The company added that Burry had incorrectly included taxes on restricted stock units in his calculations.

Furthermore, Nvidia emphasised that employee equity grants should not be conflated with the performance of the buyback programme. 'Employees benefiting from a rising share price does not indicate the original equity grants were excessive at the time of issuance,' the firm stated.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.