Lessons from history: will Nvidia, Palantir and OpenAI repeat the fate of the stars of the dot-com bubble?

Legendary investor Michael Burry, who predicted the 2008 mortgage crisis and was the hero of the book and movie "The Downgrade," says there is a bubble in the market that is "eerily" reminiscent of the dot-com bubble. In his recent posts on social networks X and SubStack, he predicts that the current leaders of the AI race will repeat the fate of the investor favorites of the 1990s, whose fame faded after the collapse of the bubble. Oninvest looked at three of his key analogies to see what lessons Burry believes history has in store for today's investors.

In the late 90s, investors were obsessed with the idea that the Internet would change the world (and they were right). The main beneficiary of this belief was Cisco Systems. The company produced routers and switches - the "hardware" on which the network was built.

By March 2000, Cisco had become the most valuable company in the world with a capitalization of over $500 billion. Everyone wanted to build networks, and the company's revenue grew exponentially. But as soon as the dot-com bubble burst, telecommunications companies drastically cut capital expenditures. Demand for Cisco equipment disappeared instantly.

In 2001, the company was forced to write down $2.25 billion worth of inventory - there was simply no one to sell it to. The stock collapsed by 80% from its peak. Only 25 years later, Cisco's quotations returned to the level of March 2000.

Parallel to Nvidia: Today, Nvidia is the main provider of AI infrastructure. Tech giants are spending billions to buy chips for fear of falling behind in the race for market share. Burry sees the same pattern of overproduction: once the hype dies down and companies start to calculate the profitability of AI deployment, the flow of orders could dry up, bringing Nvidia's stock price down for decades.

* Enron is an energy giant that collapsed in 2001 due to false reporting.

The Netscape Navigator browser was synonymous with the Internet in the mid-90s. The IPO of the company that released it, Netscape Communications Corporation, in 1995 effectively launched the dot-com era. However, being first didn't mean winning. The company faced a swift backlash from Microsoft, which began embedding its Internet Explorer browser into Windows systems for free. As a result, Netscape lost the "browser war", was absorbed by AOL, and its technology dissolved into other projects.

Parallel to OpenAI: Burry points out a vulnerability in the creator of ChatGPT. The company burns through enormous amounts of money to train models and maintain servers, and without constant capital injections, remains operationally unprofitable.

Microsoft, like 30 years ago, is playing for keeps. By investing in OpenAI, the software giant gains access to technology and integrates it into its products, effectively turning OpenAI into its R&D department rather than an independent player. According to Burry, without a $500 billion IPO soon, OpenAI's current business model is doomed.

DiamondCluster International was a dot-com-era consulting star. The company helped businesses move into the digital age. Investors valued it as a tech startup with the ability to scale infinitely. But when the bubble burst, it turned out that consulting revenue was linearly dependent on the number of people hired and customer budgets. DiamondCluster's stock collapsed and the company lost its independence.

Parallel to Palantir: Palantir positions itself as a software company that builds data analytics platforms. However, Burry points to the business structure: implementing Palantir products requires a huge number of engineers and consultants working "in the field" with the client.

It's a service company model, not a SaaS product that can be sold a million times over at no additional cost. In addition, Burry criticizes Palantir for lavishly paying employees in stock, which dilutes the stakes of other investors and masks the real lack of profit. The comparison with DiamondCluster hints: sooner or later the market will start to perceive Palantir as an ordinary consulting agency rather than a technological marvel, leading to a multiple drop in multiples.

Michael Burry does not deny the revolutionary nature of AI, just as he did not deny the promise of the Internet in 1999. His bet is against greed and irrational valuations. In his view, the history of Cisco, Netscape and DiamondCluster shows that even world-changing companies can be a bad investment if you buy them at the peak of euphoria.

This article was AI-translated and verified by a human editor