Summary
Michael Burry, known for predicting the 2008 housing crisis and portrayed in The Big Short, is shutting down his hedge fund Scion Capital. He cites a disconnect between market prices and fundamental values, particularly highlighting concerns about an AI sector bubble and questionable accounting practices related to depreciation schedules in tech companies. His move reflects caution amid growing skepticism about the sustainability of valuations in AI-related firms.
Michael Burry’s Hedge Fund Closure
Michael Burry, famously depicted by Christian Bale in Adam McKay’s The Big Short, recently announced he is closing his hedge fund, Scion Capital. In a letter dated October 27, Burry informed investors of his decision to liquidate the fund, stating, “My estimation of value in securities is not now, and has not been for some time, in sync with the markets.” This move underscores his lack of trust in the current economic environment and market valuations.
Short Positions on Palantir and Nvidia
Shortly before closing his fund, Burry disclosed short positions against Palantir, a defense tech and surveillance company aligned with the Trump administration, and chipmaker Nvidia. On X (formerly Twitter), he revealed a $50 target price for Palantir by 2027, despite the stock trading above $170 per share at the time of publication.
Concerns Over AI Sector Bubble
Burry recently emerged from relative silence to warn about a potential bubble in the AI sector, a concern shared by other market observers. What sets Burry apart is his focus on accounting practices, specifically how companies handle depreciation schedules for their chipsets. He describes this as “one of the more common frauds of the modern era.” According to Burry, major tech companies like Oracle, Meta, and Google report the useful lifespan of their technology as five to six years, whereas he believes it is closer to two to three years.
Depreciation Schedules and Earnings Overstatement
This discrepancy in depreciation timelines has significant implications. Burry shared a chart suggesting that earnings from these companies could be overstated by $176 billion between 2026 and 2028. For example, Oracle and Meta might be inflating their earnings by more than 20%. Another short seller, Jim Chanos, has also highlighted this issue, citing cloud-based GPU provider CoreWeave as an example where more accurate depreciation would reveal minimal profitability.
Industry Reactions and Skepticism
Short sellers often face skepticism regarding their motives. Palantir CEO Alex Karp criticized Burry’s short position, stating, “As far as I can tell, the two companies he’s shorting are the ones making all the money, which is super weird,” and added, “The idea that chips and ontology is what you want to short is batshit crazy.” Such responses highlight the tension between short sellers and company executives amid market debates.
Broader Investor Concerns About AI Firms
Beyond short sellers, investors are increasingly questioning how AI companies, which continue to attract significant funding and high valuations, will generate sustainable profits. Source News reported that during a private call, investors asked OpenAI’s CFO, Sarah Friar, about slowing growth. Friar attributed this partly to reduced user engagement with ChatGPT following the implementation of stricter content restrictions. While concerns about user engagement remain, it is unclear how these factors will influence the broader market’s confidence in AI firms.