Is The AI Rally Over?
Is The AI Rally Over?
Elliott Management is one of the hedge funds telling its clients that Nvidia is in "a bubble."
Legendary hedge fund Elliott Management has only had 2 down years in its 47-year history. When founder Paul Singer speaks, people tend to perk up.
They have kept out of the Magnificent 7 stocks this year. They have just written a letter to its clients that said Nvidia, the poster boy of the AI rally, is in “a bubble” and AI is “overhyped.” Similarly, more than half of the investors in the Tiger 21 Club, composed of ultra high net worth members, do not plan to initiate new positions in Nvidia.
Bearish views on the stock seem to be borne out by the sell-off after Nvidia reported fiscal 2Q2025 earnings on 28 Aug 2024. Although the AI darling reported triple digit revenue growth and beat estimates on both top and bottom lines, investors were still disappointed by the mixed guidance for the next quarter, drop in profit margins and lack of clarity about Nvidia's new Blackwell chips.
Elliott also said that many AI applications were “not ready for prime time” and was skeptical that big tech firms were going to keep pouring billions into buying Nvidia's graphics processing units. It also said that big tech firms were in “bubble land.” Many of the AI applications were “never going to be cost-efficient, are never going to work right, will take up too much energy or will prove to be untrustworthy.”
Simply put, expectations were too high for Nvidia. The stock has run up about 118% year to date and its parabolic climb means that it was priced for perfection.
For semiconductor stocks as a whole, volatility has reached extremes.
In the most recent earnings season, Amazon, Microsoft, Alphabet and Tesla have also failed to meet earnings expectations. Combine that with news of Warren Buffet's almost $80 billion sale of Apple shares by the end of June 2024, halving the size of his stake.
Big Tech is also mired in legal antitrust battles. A US federal judge has found Google guilty of being a monopoly. This includes a penalties hearing that could take months or years. In the worst case scenario, it includes the possibility of a Google break-up. It also has wide-ranging implications for pending anti-trust lawsuits against Apple, Amazon and Meta.
With its high share of overseas revenue, the technology sector also faces problems should Trump win the election and implement his hefty global tariffs.
As for Nvidia itself, Deutsche Bank AG's Jim Reid has a scary overlay chart comparing Nvidia to Cisco in 2000. If it is anything like Cisco, there is quite a lot of downside to go.
But is it really like Cisco? Going by PE ratios, Nvidia at 50x has already peaked and is nowhere as expensive as Cisco's 250x in 2000.
The truth is, no one really knows whether AI is in a bubble or not, or if the billions of dollars invested in AI infrastructure will result in productivity gains.
What is the Gartner Hype Cycle?
Capital Economics’ Neil Shearing takes a macro approach towards assessing the impact of AI on the wider US economy and productivity gains.
For example, it took over 70 years for the steam locomotive to be widely adopted. The adoption lag for the information technology revolution of the 1980s and 1990s took 5 to 10 years.
By the mid-1990s, US productivity expanded at double the pace of the 1980s.
Similarly, Shearing sees AI-related productivity gains coming in only between 2025 to 2030.
The big question is, where does AI lie in the Gartner hype cycle?
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