Summary: Michael Burry, known for predicting the 2008 housing crisis and famously portrayed in The Big Short, is shutting down his hedge fund Scion Capital. He cites a disconnect between market prices and underlying fundamentals, particularly highlighting what he sees as a bubble in the AI sector. Burry points to questionable accounting practices around chip depreciation that may be inflating earnings, a concern echoed by other investors and short sellers. His cautious stance reflects broader skepticism about the sustainability of current AI market valuations.
Michael Burry’s Hedge Fund Closure
Michael Burry, the investor famously depicted by Christian Bale in Adam McKay’s film The Big Short, recently announced he is closing his hedge fund, Scion Capital. In a letter dated October 27 to his investors, Burry explained that his valuation estimates for securities have not aligned with market prices for some time. This disconnect has led him to liquidate the fund rather than continue investing in what he views as an overvalued market.
Concerns Over AI Sector and Depreciation Practices
Burry has been vocal about what he perceives as a bubble in the AI industry. He believes companies are inflating earnings by manipulating depreciation schedules for their chipsets, calling this practice “one of the more common frauds of the modern era.” Specifically, he argues that major tech firms like Oracle, Meta, and Google claim their hardware has a useful life of five to six years, whereas he estimates it to be closer to two to three years.
This discrepancy, Burry suggests, could lead to overstated earnings by as much as $176 billion between 2026 and 2028. Companies such as Oracle and Meta might be overstating their profits by over 20%. Supporting this view, short seller Jim Chanos has pointed to cloud-based GPU provider CoreWeave as an example where more accurate depreciation timelines reveal a barely profitable business.
Market Reactions and Industry Responses
Burry’s short positions have drawn criticism, particularly from the companies he is betting against. For example, Palantir CEO Alex Karp dismissed Burry’s short on his company, 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 called the idea of shorting chip and ontology companies “batshit crazy.”
Questions Around AI Companies’ Profitability
Beyond Burry’s concerns, other investors are also questioning the long-term profitability of AI firms. Reports indicate that during a private call, investors asked OpenAI’s CFO Sarah Friar about slowing growth, which she partly attributed to reduced user engagement with ChatGPT following the implementation of stricter content restrictions.
While some speculate about the types of content that might maximize user engagement, such as more provocative material, it remains unclear how these factors will influence market confidence and the sustainability of AI companies’ valuations.