Michael Burry, the investor whose successful bets against the US housing market in 2008 were depicted in the film ‘The Big Short’, has closed his hedge fund, Scion Asset Management.
“My estimation of value in securities is not now, and has not been for some time, in sync with the markets,” Burry said in the letter to his clients.
And, this time, Burry is highly skeptical of the AI bubble. In November, Burry launched a paywalled Substack named Cassandra Unchained. His initial post criticized Nvidia, comparing it to Cisco during the dot-com crash, highlighting concerns regarding the current AI investment bubble. Later, Nvidia issued a statement for Wall Street analysts, countering certain claims made by Burry.
The U.S. markets are moving forward with great momentum, led by the AI revolution and giants such as Nvidia and Broadcom, which are up 36% and 47% year to date, respectively.
The S&P 500, which is up 17% year to date, heavily relies on the ‘magnificent seven,’ which makes up 35% of the index. The Magnificent Seven gave returns of nearly 4x that of the S&P 500 between 2015 and 2024. This exemplifies the over-reliance of the S&P on the Magnificent Seven.
Recently, Dr. Michael Burry warned of an ‘AI Bubble’ that is going to burst soon. Michael Burry predicts a stock market crash due to the AI bubble.
A ‘bubble’ by its definition is a fragile enclosure that is inflated by gas and is always close to popping or bursting. In the world of economics, a bubble is made when prices of assets (such as stocks, bonds, commodities) surge far above their true intrinsic value by speculation, herd mentality or optimism.
Burry was among the very first to not only spot the 2008 American Housing Bubble, but also identify the systemic failure that led to its creation. He started warning and buying Credit Default Swaps all the way back in 2005 and made over $800 million from the bubble
bursting.
Now, Burry is drawing parallels between the ‘dot-com bubble’ and the present-day scenario of AI and big tech. Going as far as to call Nvidia the equivalent of Cisco (stock price plummeted 85%) and comparing OpenAI with Netscape. But what was the dot-com bubble?
The Dot-Com Bubble
In the 1990s, the latest technology to hit the mass consumer market was ‘the Internet’, a revolution in technology which was being adopted by almost every household.
Low interest rates in 1998-1999 led to venture capitalists making speculative investments into tech companies at the time, many of which had little to no profit. And they were burning capital to operate, and excessively spending on marketing and promotions to keep the most mind share.
Internet firms received 39% of all venture capital funding by 1999. Internet firms accounted for the majority of the 457 initial public offerings (IPOs) that year, with 91 occurring in the first quarter of 2000 alone.
While companies like Intel, Cisco, and Oracle drove growth in tech, upstart dotcom companies sparked the stock market surge.
Dotcom Bubble Burst
When funding started to run out, the dotcom bubble imploded. The Internet’s widespread use, record-low loan rates, and interest in innovative firms made it possible for money to flow freely in the years before the boom, particularly to startups with no track record of success.
Money finally dried up as valuations increased. The market crashed as a result of businesses collapsing, many of which had no product or business plan.
On 10th March 2000, the NASDAQ reached its peak, and following the bubble burst, it took 15 years for NASDAQ to reach back to its high before the crash.
Major market players such as Amazon, Cisco, and Apple lost over 80% in value. These present-day giants survived due to strong fundamentals, whereas companies and investors largely responsible for the bubble lost everything.
Why does Dr. Burry predict the AI bubble to burst?
The caution issued by Dr. Michael Burry is essentially quantitative. As mentioned earlier, the Magnificent Seven now make up almost 35% of the S&P 500, which increases the risk of severe index concentration.
Despite revenues expanding much more slowly than its value multiple, Nvidia’s market capitalization increased by hundreds of billions of dollars in just one year.
Leading AI-related companies’ forward P/E ratios are pricing in years of almost flawless execution. Burry draws a comparison between this and the dot-com period, when the NASDAQ had a roughly 77% collapse after surging over 400% between 1996 and 2000, destroying nearly $5 trillion in value.
His argument is mathematical rather than anti-AI: market corrections are statistically unavoidable when capital inflows, expectations, and values increase more quickly than cash flows.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor in the respective jurisdiction.
