Michael Burry Says We're In Another Bubble

Key Concepts

• Capex (Capital Expenditure): Spending by companies on fixed assets like servers, data centers, and infrastructure. Currently at record levels for Big Tech.
• AI (Artificial Intelligence): The driving force behind much of the market activity, particularly impacting software companies and increasing demand for compute power.
• Hyperscalers: Large technology companies (Amazon, Microsoft, Google, Meta) providing cloud computing services and infrastructure.
• Moat: A company’s ability to maintain competitive advantages, protecting its market share and profitability.
• Net Income: A company’s profit after all expenses, including taxes and interest, have been paid.
• Free Cash Flow: The cash a company generates after accounting for cash outflows to support its operations and maintain its capital assets.
• Dot-com Bubble: The speculative investment bubble in internet-based companies in the late 1990s.

Market Divergence: Big Tech Capex & AI Impact

The market is currently experiencing a divergence in sentiment. Software companies (SaaS) are facing sell-offs due to the capabilities of AI models like Claude, which are integrating with and potentially disrupting existing software solutions. Simultaneously, the hyperscalers – Amazon, Microsoft, Google, and Meta – are also experiencing sell-offs, but for a different reason: unprecedented levels of capital expenditure (capex). This episode analyzes both situations and presents a bullish perspective on the hyperscalers.

Concerns Regarding Big Tech Capex

Investors are increasingly skeptical about the massive capex spending by Big Tech companies, totaling over $600 billion projected for this year. Concerns center around the potential for low returns on investment and the uncertainty surrounding the utilization of these funds. This skepticism is fueled by comparisons to past bubbles, particularly the dot-com bubble of the early 2000s.

Michael Burry, known for predicting the 2008 financial crisis, has been vocal about this, pointing to Google’s issuance of a 100-year bond as a parallel to Motorola’s actions before its decline. Burry argues that this massive spending without guaranteed returns mirrors the unsustainable practices of companies during previous bubbles. He posted on X stating, “Alphabet is looking to issue a 100-year bond…Last time this happened was Motorola in 1997, which was the last year Motorola was considered a big deal.” Analysts are lowering price targets for these companies, reflecting their concerns.

The Bullish Counterargument: A New Utility Landscape

Despite the widespread skepticism, the speaker actively invests in Microsoft, Amazon, Meta, and Google (though considers Google less attractive currently). The core argument is that these companies are fundamentally different from those of the dot-com era and are evolving into “new utilities.”

Here’s a breakdown of the supporting points:

• Financial Strength: These companies generate significantly more cash flow and profits than companies during the dot-com bubble. Google, for example, is the highest net income earning company globally.
• Annuity-Like Income: Companies like Google have established ecosystems with billions of users across multiple platforms (YouTube, Search), creating predictable and recurring revenue streams.
• Capex as Investment, Not Survival: Google’s 100-year bond issuance isn’t driven by necessity but by financial flexibility – locking in low interest rates and tax benefits. This contrasts with Motorola’s situation in 1997.
• AI-Driven Growth: AI is already accelerating revenue growth across these companies, particularly Meta, demonstrating a tangible return on investment. Jensen Huang, CEO of Nvidia, echoes this sentiment, highlighting the immense software opportunity driven by AI. He stated that AI is “changing these businesses” and that “Meta is an example today of how AI is changing these businesses.”
• Valuation Discrepancy: Meta, Amazon, and Microsoft are currently trading at historically low valuations relative to their growth potential, presenting a buying opportunity.

Portfolio Adjustments & Specific Company Analysis

The speaker has been actively reallocating capital within their portfolio, selling Equifax and Salesforce to increase their position in Meta. Meta is now the second or third largest holding, representing a significant portion of the portfolio.

• Meta: Considered the most compelling buy due to its historically cheap valuation combined with a projected 22% revenue growth rate (potentially reaching 33% next quarter). The speaker emphasizes Meta’s ability to effectively leverage AI.
• Amazon: Valuation is becoming more attractive as Amazon reinvests cash flow into capex to meet growing demand, particularly in AWS. The company has a $244 billion backlog.
• Microsoft: Trading at valuations lower than IBM, Costco, and Walmart, despite its diversified business and strong position in enterprise software.
• Google: While not currently considered a buy due to its higher valuation, the speaker acknowledges its past success and the potential for similar valuation expansion in the future.

Data & Financial Metrics

• Capex Spending: Projected to exceed $600 billion this year for the four companies analyzed. Increased from $150 billion in 2023.
• Net Income (Trailing 12 Months): Microsoft ($120B), Google ($132B), Amazon ($77B), Meta ($60B). (Adjusted for investment gains and tax impacts).
• Free Cash Flow: Generally flat or declining for Microsoft and Google, significantly lower for Amazon ($7.7B).
• Revenue Growth: Accelerating across all four companies, driven by AI adoption. Meta currently at 22% growth.

The Anthropic/Claude Super Bowl Ad Fail

The episode critiques Anthropic’s Super Bowl ad campaign for Claude, which indirectly criticized OpenAI’s planned ad integration into ChatGPT. The speaker argues the ad was “creepy” and ultimately detrimental to the perception of AI, potentially harming both Anthropic and the broader AI industry. The ad’s attempt to highlight the downsides of ads ironically used an ad to do so, creating a sense of hypocrisy.

Conclusion

The speaker believes the market is mispricing Big Tech companies due to concerns about capex spending. They argue that these companies are fundamentally strong, financially resilient, and poised to benefit significantly from the AI revolution. The current market conditions present a buying opportunity, particularly in Meta, Amazon, and Microsoft. The speaker’s investment strategy is based on a long-term perspective and a conviction that these companies will continue to dominate their respective industries.