Even a Broken Clock Is Right Twice a Day. Is Michael Burry Finally Right About the AI Bubble?
Chip stocks cratered on Thursday, and Michael Burry's bearish bets looked brilliant for a day. His record includes a famous reversal, though, and the real test of an AI bubble sits in a number most investors skip.
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Wall Street spent much of the year rewarding companies for building more data centers, buying more chips, and finding enough electricity to run them. On Thursday, investors took a harder look at what all that spending might earn. The Nasdaq Composite fell 5.52%, its worst session in 19 months, while the S&P 500 lost 4.36%, according to Reuters. The Philadelphia Semiconductor Index fell 12.2%, and Nvidia (NASDAQ:NVDA | NVDA Price Prediction) dropped more than 9%. The Nasdaq finished at least 10% below its October closing high, putting it in correction territory.
For Michael Burry, the investor made famous by The Big Short, the rout was the kind of day he’d been betting on. Investors who’ve heard his warnings before have good reason to ask how much one brutal Thursday proves.
Burry Has Sounded the Alarm Before
Burry earned his reputation by buying protection against subprime mortgage bonds in 2005. As he later told a Vanderbilt University audience, he endured months of paper losses and pressure from his investors before the trade paid off in 2007. Since then, his bearish calls have had a mixed record.
In late 2022, Burry warned of a recession that could last years. The U.S. economy expanded in 2023. That January, he gave investors one word of advice. “Sell.” By March 30, he was congratulating people who’d bought the dip. “I was wrong to say sell,” he wrote. The S&P 500 finished the first quarter higher.
Burry’s fund also held puts tied to the S&P 500 and Nasdaq-100 in mid-2023. Both indexes fell in the third quarter, and the puts were gone from the fund’s next filing. The public filings leave the trade’s profit or loss unknown.
What Thursday’s Selloff Told Us
In October, Burry said he’d moved most of his bearish options exposure into puts on the Nasdaq-100 and the VanEck Semiconductor ETF (NASDAQ:SMH). As TheStreet reported, the Nasdaq-100 puts expire in April 2027, and the chip ETF puts expire in June 2027. Puts can gain value when prices fall, provided the drop comes before they expire.
Burry reportedly sold a quarter of his chip ETF puts as the fund fell 11.2% Thursday and kept the rest. He gave no profit figure. His broader thesis hinges on what companies earn from the infrastructure they’re building.
The AI Bubble Test Is in the Cash Flow
A data-center delay can hurt a chip supplier even when customers still want more computing power. UBS estimates that potential construction pauses could affect about 30% of expected U.S. data-center capacity additions in 2028, Reuters reported. A facility that opens a year late can push equipment orders and customer revenue further out, even as developers face bills on work already underway.
The big cloud companies show why it’s worth following the cash after capital spending. Microsoft (NASDAQ:MSFT) said Azure revenue grew 48% in its September quarter, and the company generated $18.6 billion in free cash flow. Amazon (NASDAQ:AMZN) reported 39% growth at Amazon Web Services that quarter, yet companywide free cash flow swung from a $14.8 billion inflow to a $42.4 billion outflow over the 12 months through September. Amazon attributed the jump in equipment and property spending primarily to AI.
Those companywide figures show how two businesses with fast-growing cloud operations can have very different cash cushions. If demand cools or projects slip, the company with more cash left after expansion has more room to adjust.
Key Takeaway
Burry got the direction right on Thursday, and his 2023 reversal is a reminder of how quickly a market call can go stale. The stronger case for an AI bubble would show up over several earnings reports. If capital spending keeps rising while free cash flow shrinks and earnings expectations fall, investors may still be paying for growth the business can’t deliver. That’s the risk worth watching after the chip selloff.
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After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years, he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, Money Morning, and, of course, 24/7 Wall St. He has been featured in both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.
