Understanding Michael Burry's Bet Against AI: Here's What it Really Means for Investors

Core Viewpoint - Michael Burry's skepticism towards AI-focused companies, particularly Nvidia, stems from his belief that these companies are overly optimistic about the depreciation rates of their AI-related hardware, which could lead to significant earnings overstatements [1][2][3] Group 1: Burry's Argument Against AI Stocks - Burry argues that hyperscalers are underestimating the depreciation of their AI hardware, projecting a total understatement of approximately $176 billion in depreciation from 2026 to 2028 [3] - He claims that companies like Oracle and Meta Platforms could be overstating their earnings by nearly 27% and 21%, respectively, due to these incorrect assumptions [3] - Burry predicts that when these assumptions are corrected, it will lead to a burst of the AI spending bubble and a negative reassessment of AI investment returns [4] Group 2: Depreciation and Its Implications - Depreciation is crucial as it affects profitability; a lower depreciation rate can artificially inflate earnings while reducing cash flow [6][7] - Burry's analysis indicates a trend among hyperscalers to lower depreciation rates, with Amazon being a notable exception [8][9] - If Burry's views are accurate, hyperscalers may need to increase capital spending significantly, which could harm their cash flows [11] Group 3: Criticisms of Burry's Thesis - Critics argue that major companies like Alphabet, Microsoft, and Meta Platforms do not need to manipulate earnings as they are already highly cash-generative [13][14] - The focus of AI investment is on long-term earnings rather than short-term profits, as evidenced by Alphabet's Google Cloud showing significant profit growth despite initial losses [16] - Nvidia's management supports the assumption of a longer useful life for their GPUs, contradicting Burry's claims [17] Group 4: Investment Implications - The overall investment growth in AI may be scaled back due to a mix of productive and unproductive investments, making it difficult to predict future growth rates [18] - Investors are advised to focus on cash-flow-based valuations rather than earnings, particularly avoiding less financially robust companies like Oracle and Amazon [19]