Moneycontrol Pro Panorama | Your bubble is my bubbly

-

Dear Reader,

Last Friday, we wrote how Artificial Intelligence (AI) has been too good a story and investors are mostly buying the narrative reflected in the richly valued AI-focused companies where Nvidia is the crown jewel. On Monday, we pointed out how AI has created the great capital exodus from traditional oil companies to alternative energy firms.

So, we know where the money is flowing, and we know who is responsible for this. The question now is: Should it be so? Perhaps, famed contrarian Michael Burry of hedge fund Scion Asset Management, who foresaw the US housing bubble, asked the same question and Burry’s answer seems to be no. This week, Burry released the cat among the canaries by disclosing that he shorted the AI poster boys Nvidia and Palantir shares, and he is betting against AI. His position may not sway everyone, but it does give currency to the rumbles of an AI bubble in the markets. Ironically, most investors including the executives bringing AI to our lives agree there is a bubble. But for AI sympathisers (or evangelists), the bubble is nothing but bubbly.

Indeed, Nvidia’s Huang has long popped the bubbly for his company even as the company’s colossal $5 trillion market valuation gives strong-hearted investors the heebie-jeebies. It has been nearly half a decade and the champagne hasn’t stopped flowing in the AI party. Note that even as the AI exuberance has created millionaire investors and billionaire entrepreneurs, the adoption of the technology has also seen an exponential rise in various fields.

Does that mean not all bubbles are bad? Tim Hartford, in his Undercover economics column in FT which is free to read for all Moneycontrol Pro subscribers, goes back to the 19th century to figure out the answer. Hartford points out the theory that while bubbles may be debilitating to investors, irrational exuberance results in the benefit of the consumers. “Entrepreneurs and inventors who do take a risk will soon find other entrepreneurs and inventors competing with them, and most of the benefits will go not to any of these entrepreneurs, but to their customers,” Hartford writes.

Related stories

Aparna Iyer

Deputy Editor|Moneycontrol

• 
  Affordable housing finance companies face growth slowdown as market matures
• 
  Why this April is more than a seasonally slow month for life insurance
• 
  Moneycontrol Pro Panorama | How to face your tariff dragon

The case study is the British railways bubble in 1860s where everyone got excited about railways and valuations went to questionable levels and eventually many investors lost their shirts. But we as consumers use railways many centuries later today extensively. If AI is anything like this, maybe we need not worry.
This means that AI in the end would benefit the users, which is us. But towards this great technological utopia is a path littered with bleeding investors. This seems to be inevitable, and it is better to not be the one bleeding out.

Investors can get an initial first aid training to avoid injuries in Ananya Roy’s piece today. Roy lays out the cautious points that investors must keep in mind to avoid getting overwhelmed with AI exuberance. Roy also points out that growth is overestimated, and costs are becoming elevated for AI. For perspective, the users of ChatGPT have grown exponentially from 500 million to 800 million, but conversion from free to paid usage is a mere 5-6 percent.

This underscores Hartford’s theory. For OpenAI, the revenue from ChatGPT isn’t great, but for users of ChatGPT, sky has been the limit in terms of convenience and efficiency. The adoption of AI by other big tech firms such as Alphabet and Meta shows first mover advantage is limited for innovators.

That does not mean customers come out on top all the time. There are instances where AI usage hasn’t delivered and instead resulted in suboptimal output.

The upshot is that AI as a product is great and poised for continuous growth as it gets integrated into various fields and use cases. But in no way does that justify the stratospheric valuations of companies such as Nvidia, Palantir or OpenAI.

That brings us back to Burry’s contrarian bet on AI. In some cases, contrarian bets may just be a hedge, nothing more or nothing less. Burry’s shorts need not be seen as a bet against AI, but a hedge against irrational valuations. That every investor must have to avoid bubbles and go for the bubbly instead.

Investing insights from our research team

Mas Financial Q2 FY26: Soft report card, long-term story untarnished

Pine Labs IPO: Should investors bet on it?

Weekly Tactical Pick: Can this AMC stock weather regulatory headwinds?

Kaynes Technology India: Sell into the earnings strength

Thangamayil Jewellery: What should investors do after the steep run-up?

MTAR Technologies: Strong visibility for H2 FY26

Crompton Q2: Unseasonal rains hit demand; outlook bright

Power Grid Corporation: Execution bottlenecks ease

Syngene: Is the worst of worries priced in?

What else are we reading?

Chart of the Day: Lending to infrastructure grows -- at one-year high rate

Is there finally light at the end of the tunnel for microfinance loans?

India’s R&D push — The reality and the dilemma

Nvidia's $5 trillion m-cap milestone puts AI stock market hype to the test

Beyond Carbon: Why COP must bring life cycle thinking into the climate conversation

Tackling farmer distress requires imaginative long-term solutions

Are bubbles good, actually? (republished from the FT)

Sequoia’s shake-up may be a VC turning point (republished from the FT)
RSSFACTS: ‘Vande Mataram’ at 150: A prayer to the motherland; not a call to idolatry

Private participation in India’s space ecosystem will reach a milestone in 2026 with rocket launches

Tech and Startups

GCCs, ER&D drive hiring with 30-40% salary hikes, says TeamLease even as IT stays flat

Technical Picks: NATIONALUM, PHOENIXLTD, PAYTM, GOLDBEES

Aparna Iyer
Moneycontrol Pro