This article first appeared on GuruFocus.
Michael Burry (Trades, Portfolio), of Big Short fame, has made some waves for calling out AI companies, alleging that they are understating depreciation by extending the useful life of assets artificially boosts earnings. In case you're unfamiliar, Burry was one of the first to spot the housing crisis that set off the Great Recession. I have a lot of respect for Mr. Burry, so I wouldn't write his comments off. That said, there are some important caveats worth discussing.
Separately, I've been lightly researching AI chip obsolescence because it's been a popular topic on Reddit and other places. Burry's comments immediately piqued my attention. A common argument is that AI chips become obsolete after just a few years because newer chips offer stronger computing power and/or energy efficiency. This specific argument, I believe, is misplaced because older AI chips will still have many relevant uses running older and/or lighter AI models rather than the bleeding-edge models. These lighter models represent a hot potential growth area, making older chips not just viable but valuable. I can't say for certain that Burry is worried about obsolescence, but he has mentioned useful lifespan.
Another concern: How long will the chips last before physically breaking down? I have not found a conclusive answer, but so far, my impression is that they typically last longer than 3 years. If the lifespan average falls under three years, Burry's argument gains a lot of strength. If the chips can last significantly longer, however, that'd create headwinds for his thesis.
So far, Burry has been rather vague concerning the matter, so it's hard (impossible?) to evaluate his argument. Details are forthcoming, but for now, we can consider possible angles and perhaps more importantly, critique common arguments and popular beliefs. With that in mind, I believe it's important to take a deeper look at the potential lifecycle for AI chips. Until I see Burry's argument, I can't really refute it, but I believe the discussion below is important, and if nothing else, will provide readers with useful food for thought. It should also act as a primer for when Burry makes his November 25th release.
All of this is important for investors owing to concerns over the AI race and potential bubble. Stock markets and the economy have, in many ways, been propped up by AI investments. Valuations have been pushed high with AI companies leading the charge. Outside of AI investments, the American economy seems to be teetering on the verge of recession. If Burry is correct, it'll inject a lot of skepticism into the markets, potentially causing corrections. It could also call into question the viability of current strategies and use cases around AI.