AI "is overhyped, with many applications not ready for prime time," warned iconic hedge fund Elliott Managment last week in their latest letter to investors:
And further, we think a good proportion of the purported use cases 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. But right now, the scramble for facilitating super-chips, together with the compulsion to jump on board the hype train, is causing a radical skew in the market values of the anointed.
It is not possible now to determine with much accuracy when AI’s “day” will really arrive. So far, generative AI is not creating the much-predicted productivity miracle, and there are few real uses aside from areas such as summarizing notes of meetings, generating reports and helping with computer coding. Nevertheless, generative AI has sparked a veritable arms race among the “Big Four” hyperscalers (Meta, Google, AWS, and Microsoft), driven by the hope that NVIDIA’s graphics processing units (GPUs) will be the dominant currency in the race to unlock AI’s supposedly boundless potential.
This year, the Big Four plan to spend an estimated $160 billion on datacenter capex focusing on GPUs, a capex level that is 50% more than they spent in 2023 and nearly 3x the level they spent in 2018-2020 before generative AI enthusiasm sparked the great GPU arms race. Consensus expectations assume that these capex levels will remain elevated for the foreseeable future. Yet, in the absence of finding a “killer app” or significant ROI realization, will these hyperscaler customers continue to buy NVIDIA GPUs at record levels?
We are skeptical and believe the road ahead may prove choppier. If we look past the hype and the hysteria of AI “transforming human life,” what is left is a software-development project that so far is not producing value commensurate with the hype (except for what we believe to be very bubbly stock market value).
Elliott's view echoes that of Goldman Sachs head of research Jim Covello, who warned:
