Prominent short seller James Chanos says the biggest risk in today’s artificial intelligence boom is not the technology itself, but the underlying demand fueling the hundreds of billions of dollars in CapEx.
In a new interview on The Monetary Matters Network, Chanos says the structure of the AI CapEx cycle is more dangerous than the one witnessed in the 1990s during the height of the telecom bubble.
According to Chanos, the scale of today’s capital spending in data centers is one reason for his caution.
“The real boom-bust in dot-com wasn’t semiconductors, it was telecom equipment. And that’s where the bust occurred. And so again, I think that where we’re seeing it now is in the massive, massive CapEx going into AI data centers. And that’s clearly where it is. I mean, you can’t miss the numbers.”
Chanos also pushes back on the idea that the companies participating in the investment cycle back then were unprofitable, like the famous Pets.com.
“Most of the companies ordering that telecom equipment were Corporate America, right, building out their networks for the internet. And they were profitable. Customers were profitable. They just cut back on their spend… The real spending was coming from the General Electrics, the Coca-Colas, the AT&Ts, the US West and Pac-Bell and Verizon. Those companies were immensely profitable. And they were the ones buying from Cisco, Lucent, Nortel, and then cut their orders.”
According to Chanos, the composition of today’s AI demand flips that historical comparison on its head.
“What’s scary about this one is that the underlying customers that are spending a lot of the money are unprofitable. And so it raises the risk level. I think, in a way, that’s worse than 1999 and 2000.”
The short seller highlights that he’s not talking tech titans Microsoft, Amazon or Meta, who are buying chips from Nvidia. While he did not name names, he says he is referring to the companies buying compute from data centers.
“A very, very large amount of that underlying demand… is inherently quite unprofitable… That’s why I keep getting back to you on this 2027-2028 timeframe… The unprofitable companies as a percentage of the spend is higher in this cycle than it was in the telecom cycle. I guess that’s my message.”
In October, venture capitalist Deedy Das shared a list of 15 of the most valuable AI startups, where three firms that are worth at least $12 billion are generating $0 in revenue.
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