‘Big Short’ investor Michael Burry says there’s a major contradiction at the center of the AI trade

• Michael Burry sees a major contradiction in the bullish run of the AI ​​trade.

• He wrote that the best-case scenario looks different for Nvidia compared to AI hyperscalers.

• Although AI bulls see a best-of-both-worlds scenario, Burry argues that such an outcome is unlikely.

Michael Burry says bullish AI investors need to be realistic about what the future will bring.

“Big Short” investor announced placed new bets last week Nvidia And Tesla’sas well as the iShares Semiconductor ETF (SOXX). He followed up with a post dated July 9th. bottom stack Where he eliminates a contradiction he sees at the heart of AI business.

“Hyperscalers simultaneously promise permanent demand growth and temporary spending for 3-4 years,” Burry wrote. “Nvidia needs sustained demand growth. Hyperscalers need this surge to be mostly gone in 3-4 years.”

Burry said Nvidia essentially needs an endless cycle of demand for high-priced AI chips. According to him, there is a gap between the chipmaker’s current and future revenues.

“Nvidia’s revenue growth is mostly real, but the solution to the problem is
“The bottleneck, in whatever form it takes, whenever it happens, reduces Nvidia’s revenue duplication rate, which also reduces the scarcity premium and therefore the margin for both new and old chips,” Burry said.

Extending this demand cycle could help Nvidia, according to Burry. But the best thing for hyperscalers like Meta, Amazon, and Microsoft would be a much different scenario, where the massive capex cycle would be completed within a few years.

Companies that buy Nvidia chips face challenges, Burry said. AI capital expenditure rose in this period in recent months data center explosion, and free cash flow collapsed.

The question of how long they could go without seeing a return on such a large investment caused concern among investors, and Burry shared this.

“Hyperscalers are already seeing free cash flow falling towards zero,” he said. “The stated profit is partly a result of long depreciation schedules, but the owners’ earnings are not.”

Burry also said AI bulls see a scenario where a “third door” opens, leading to a market with infinite demand and constrained spending, an outcome that benefits both hardware makers and capital spenders. Burry sees no such path ahead.

“There is no third door,” he said.

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