Nvidia stock is in a “bubble” and its rally is being driven by an “overhyped” AI technology, hedge fund Elliott Management has told investors in a letter seen by the Financial Times.
The hedge fund, which manages around $70 billion in assets, reportedly said that mega-cap tech stocks including NVIDIA Corporation (NASDAQ:NVDA) are in “bubble land,” voicing skepticism that the high-volume purchases of Nvidia's graphics processing units by Big Tech companies will continue.
Elliot noted that AI is “overhyped with many applications not ready for prime time," the FT's report says.
It believes that many touted AI applications 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.”
The asset manager’s remarks come as chip stocks, which have surged due to investor excitement over generative AI, have recently stumbled amid doubts about sustained investment by large companies.
Nvidia, a key player in the market for processors essential for building AI systems like OpenAI’s ChatGPT, has seen major investments from technology giants like Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), and Amazon (NASDAQ:AMZN), which have been spending billions on AI infrastructure.
However, despite these investments, many of Nvidia’s significant clients are developing their own competing chips.
Nvidia’s stock has fallen by over 20% since late June, when it temporarily became the world’s largest company with a market capitalization exceeding $3.3 trillion, amid growing concerns about the sustainability of AI investments and the slowing U.S. economy. Still, the chipmaker’s shares remain up about 120% this year and have increased more than 600% since the start of 2023.
In the client letter, Elliott mentioned that it had largely avoided what it described as bubble stocks, including those in the Magnificent Seven.
Regulatory filings indicate that Elliott held a small position in Nvidia, valued at approximately $4.5 million at the end of March, although it is unclear for how long it held this position.
According to the report, the hedge fund has also been cautious about shorting high-flying technology stocks, noting that such a strategy could be “suicidal."
Elliott also emphasized that AI has yet to deliver the significant productivity boost that was promised. It remarked that there are “few real uses” for AI at this stage, beyond “summarising notes of meetings, generating reports and helping with computer coding.”
The letter concluded that AI, so far, is essentially software that has not provided “value commensurate with the hype.” The current bubble could burst if Nvidia reported poor financial results and thereby “breaks the spell.”
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