Steve Eisman Bets on AI Infrastructure Stocks Over Flashy Software

Steve Eisman, the investor famous for his role in The Big Short, recently shared his cautious view on AI investments during a podcast with Brandon van der Kolk. He advised against direct investments in large language model (LLM) developers, citing a lack of long-term competitive advantages or “moats.” Eisman pointed out that users easily switch between different AI models, making it difficult for any single provider to maintain dominance.

Eisman also raised concerns about cloud hyperscalers, noting that their heavy spending on data centers has eliminated free cash flow. He highlighted Alphabet Inc. (GOOG, GOOGL) raising $85 billion in equity as an example of this financial strain.

Instead of betting on software or cloud platforms, Eisman recommended investing in the infrastructure supporting these technologies. He identified Nvidia Corp. (NVDA), Micron Technology Inc. (MU), GE Vernova Inc. (GEV), Arista Networks Inc. (ANET), Cisco Systems Inc. (CSCO), and Eaton Corp. (ETN) as key “picks and shovels” plays. These companies supply the hardware and components essential for AI development, benefiting from the capital expenditures of cloud providers.

Eisman warned of significant sector risks, including a concentration of revenue among a few customers. For instance, 70% of Nvidia’s accounts receivable come from just five clients, and 70% of hyperscaler AI revenue is tied to Anthropic and OpenAI. He cautioned that financial troubles for these AI firms could disrupt the entire supply chain and even trigger a recession.