In an era dominated by AI narratives, Greenlight Capital stands out as a contrarian voice. Founder David Einhorn, in his latest letter to investors, continues his role as a skeptic amid the tech euphoria. While acknowledging AI's transformative potential, Einhorn raises red flags about its financial viability—questioning the "Magnificent Seven's" free cash flow gaps, ballooning capex, and valuation inconsistencies. His message is clear: When narratives fade, profits remain the ultimate valuation metric.
The value-oriented hedge fund, known for its fundamental approach and occasional short positions, has underperformed recently. Q3 2025 saw a -3.6% net return versus S&P 500's 8.1% gain, with short positions dragging performance by 6.6%. Einhorn dedicates significant analysis to AI's economic realities, noting even tech giants struggle to fund AI ambitions without debt—despite $500B in collective free cash flow pre-AI boom.
His 3,000-word critique doesn't dismiss AI's promise but highlights structural challenges: - The $6.7T projected data center spend by 2030 dwarfs available capital sources - AI would need to capture 100% of current global ad/subscription markets ($2T) to justify investments - Current LLMs, while impressive, fundamentally lack true reasoning capabilities
New positions reveal Greenlight's value DNA: - PG&E (PCG) at 8x P/E after wildfire fund concerns created mispricing - Micro-cap biotech COYA Therapeutics (COYA) with Nobel-linked ALS treatment research
The letter contrasts sharply with tech bulls like Cathie Wood, emphasizing that disruptive potential doesn't guarantee investment returns. Einhorn warns of potential "capital destruction" even if AI succeeds, drawing parallels to dot-com era misallocations.
Gold remains a core hedge (up 17% in Q3) amid fiscal concerns, while the fund exited Teck Resources (TECK) after a 52% IRR. Top holdings include Brighthouse Financial and Green Brick Partners.
Einhorn concludes: "When risk/reward becomes disconnected, we step back—even if it means temporary underperformance." His analysis serves as a sobering counterpoint to trillion-dollar AI dreams, emphasizing that exponential narratives often outpace linear financial realities.