Fears of an AI bubble continue to mount as investors question whether the recent surge in investments and record-breaking US megacap tech stock rallies are driven more by hype and speculation than genuine end-user demand.
Overvalued stocks are also raising alarms across Wall Street, with prominent investors such as Michael Burry increasing bets against AI giants like Nvidia.
This year, a rally spearheaded by Nvidia helped push US benchmark indices to record heights. However, the momentum appears to be waning. Nvidia's share price has fallen nearly 8.4% in the past month and declined another 3.8% yesterday following a regulatory filing revealing that a long-standing board member sold a substantial amount of the company's stock.
Harvey Jones, a Nvidia board member, sold 250,000 shares worth approximately $44 million (£32.9 million) on 15th December, at an average price of $177.33 (£132.86) per share, according to the filing. Jones has held these shares since 1997, prior to Nvidia's initial public offering. Despite this, he still owns over 7 million shares through the HC Jones Living Trust.
Michael Burry's Perspective on Nvidia
Michael Burry, renowned for predicting the 2008 financial crisis, recently stated that the AI hype is largely driven by Nvidia CEO Jensen Huang's marketing efforts. He even compared Nvidia to 'a Cisco' in the context of the AI bubble debate. Cisco's shares plummeted by over 75% during the dot-com crash, serving as a cautionary tale.
Burry's analysis includes a chart indicating that the current market highs could mark the peak of this capital cycle. He suggests that Nvidia's rising investments and the broader AI sector's exuberance may represent the final overextensions before a prolonged downturn. During Q3, Burry placed a billion-dollar bet against Nvidia and Palantir, reflecting his scepticism about the current valuations.
Selling Pressure on Tesla Shares
Meanwhile, Ark Invest's Cathie Wood, a long-time supporter of Tesla and Elon Musk, sold over 124,000 shares of the EV manufacturer worth around $59 million (£44.2 million). This came after Morgan Stanley downgraded Tesla from 'overweight' to 'equal weight,' citing concerns that the stock is overvalued and advising investors to wait for a more attractive entry point.
This downgrade is notable, especially considering Burry's recent comments describing Tesla shares as 'ridiculously overvalued'. He also pointed out that Tesla dilutes its stock by approximately 3.6% annually without implementing share buybacks to counteract this dilution.
Should Pension Funds Reconsider Their AI Exposure?
American workers saving for retirement through employer-sponsored 401(k)s with significant holdings in AI stocks might be increasingly wary. The AI boom, which appeared unstoppable just a few months ago, now shows signs of strain.
Most US workers with access to 401(k)s rely on these accounts to grow their savings, often leveraging employer-matched contributions. However, if their AI stock holdings plummet following a bubble burst, it could have serious implications for their retirement plans. Diversification and risk management are crucial to weather potential market downturns, rather than chasing fleeting meteoric gains.
Burry acknowledged that he cannot predict precisely when the AI bubble might burst, but he believes there is more room for growth. 'Even when it finally tops, it will not be for any specific reason. Even if the reason is an AI buildout bubble popping, that will likely not be apparent until a year or two later,' he wrote on SubStack.
He also warned investors that stocks with the most obvious overvaluation tend to have the strongest upward momentum in the short term, which makes them particularly risky.
As the AI sector continues to attract attention and investment, cautious investors are advised to keep a close eye on the fundamentals and avoid getting caught in the hype. The recent actions of high-profile insiders and prominent investors serve as a reminder that the market's exuberance may not last forever. For those saving for retirement, the message is clear: diversification and prudent risk management remain essential, especially in volatile sectors like AI.
Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.
