Elliott Management, a Florida-based hedge fund managing approximately $70 billion in assets, has issued a stark warning to its investors regarding Nvidia, asserting that the chipmaking giant’s stock is caught in a “bubble” driven by exaggerated expectations surrounding artificial intelligence (AI).
The firm conveyed this message in a recent letter to clients, a copy of which was obtained by the Financial Times.
Elliott skeptical over AI’s long-term viability
In the letter, Elliott Management expressed skepticism about the ongoing high-volume purchases of Nvidia’s graphics processing units (GPUs) by Big Tech companies.
The hedge fund questioned whether the AI technology propelling Nvidia’s stock price is truly as revolutionary as it is portrayed.
Many of AI’s supposed uses are never going to be cost-efficient, are never going to actually work right, will take up too much energy, or will prove to be untrustworthy.
Nvidia has become a dominant player in the market for powerful processors required to build and deploy large AI systems, such as the technology behind OpenAI’s ChatGPT.
Companies like Microsoft, Meta, and Amazon have invested tens of billions of dollars to develop AI infrastructure, with a significant portion of that capital directed to Nvidia. Despite this, Elliott Management remains unconvinced about the long-term viability of these investments.
Market reactions and broader implications
The hedge fund’s warning comes at a time when chip stocks, which have experienced a significant rally fueled by enthusiasm over generative AI, are facing a downturn.
Concerns about whether large companies will continue to spend heavily on AI have led to a reevaluation of stock prices in the sector.
For instance, Intel’s shares fell by 20% following the announcement of plans to cut approximately 15,000 jobs.
Nvidia’s stock, which briefly made it the world’s largest company with a market capitalization of over $3.3 trillion in late June, has since declined by more than 20%. Despite this drop, Nvidia’s stock remains up approximately 120% for the year and over 600% since early last year.
This volatility reflects the broader uncertainties facing tech companies heavily invested in AI.
Elliott Management’s cautious approach
Elliott Management has largely avoided investing in what it terms “bubble stocks,” including those within the Magnificent Seven group of tech giants.
Regulatory filings indicate that Elliott held a small position in Nvidia worth around $4.5 million at the end of March, though the duration of this investment is unclear.
The hedge fund has also been cautious about shorting high-flying tech stocks, describing such a strategy as “suicidal.”
Founded by billionaire Paul Singer in 1977, Elliott Management has a strong track record, having only posted losses in two calendar years since its inception.
The firm reported a 4.5% gain in the first half of this year. In its letter, Elliott highlighted the gap between AI’s promised productivity gains and its actual performance.
The firm argued that AI applications to date have been limited to tasks such as summarizing meeting notes, generating reports, and assisting with computer coding, falling short of the extensive hype.
Potential for an AI market correction
Elliott Management suggested that the AI investment bubble could burst if Nvidia reports disappointing financial results, which might “break the spell” of investor confidence.
This scenario could lead to a broader reassessment of AI-related investments and their true impact on productivity and market value.
Elliott Management’s warning about Nvidia and the broader AI investment landscape highlights growing concerns over the sustainability of the current tech boom.
As AI technologies continue to evolve, the challenge for investors and companies alike will be to distinguish between genuine innovation and speculative hype.
The hedge fund’s cautious stance serves as a reminder of the need for measured expectations and careful evaluation of long-term value in the fast-paced world of technology.
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