With assets valued at around $70 billion, Hedge fund Elliott Management has warned that mega-cap tech stocks, including Nvidia Corporation, are in a "bubble." The letter sent to investors, seen by the Financial Times, suggests that Nvidia's rally is driven by "overvalued" AI technology.
Elliott Management expressed skepticism that big tech companies will continue to purchase Nvidia's graphics processing units (GPUs) on a large scale. They noted that many AI applications must still be ready for practical use.
The Financial Times report quotes Elliott stating that many of the promoted AI applications "will never be cost-effective, will not work properly, will consume too much power, or will be unreliable." This skepticism comes when chip stocks, buoyed by investor enthusiasm about generative AI, have fallen due to doubts about sustained investment by large companies.
Nvidia is a key player in the market for processors essential to building AI systems such as OpenAI's ChatGPT. Tech giants such as Microsoft, Meta, and Amazon have made significant investments in Nvidia, spending billions on AI infrastructure. Despite these investments, many of Nvidia's significant customers are developing competing chips. Since the end of June, Nvidia's stock has fallen more than 20% after temporarily being the world's largest company with a market capitalization exceeding $3.3 trillion.
Elliott Management noted that it had avoided mainly what it described as bubble stocks, including those in the group known as the Magnificent Seven. Regulatory filings show Elliott had a small position in Nvidia, valued at about $4.5 million at the end of March.
Elliott's caution also extends to short-selling strategies in booming tech stocks, describing the tactic as potentially "suicidal." The hedge fund stressed that AI has yet to deliver on the promised productivity gains. The letter concludes that AI is essentially software that has not delivered "value commensurate with the hype. The current bubble could burst if Nvidia reports poor financial results, thus breaking "the spell."
Reuters reported that Nvidia's stock price has risen approximately 120% this year and more than 600% since the beginning of 2023, highlighting the volatility and uncertainties of the current market.
