Michael Burry Bets Big Against AI Giants, Signaling Caution

Michael Burry, the hedge fund manager who famously predicted and profited from the 2008 subprime mortgage crisis, is now making a massive bearish bet against the red-hot artificial intelligence sector. According to a recent 13F filing from his Scion Asset Management, Burry invested over $1 billion in notional value during the third quarter to buy put options targeting chipmaker Nvidia (NVDA) and data analytics firm Palantir (PLTR).

A Classic Contrarian Move

Burry’s investment career is defined by high-profile contrarian bets. In the early 2000s, he astutely identified the unsustainable boom in the U.S. housing market, shorting the subprime mortgage market to earn his clients over $700 million in profits—a story immortalized in the Hollywood film The Big Short.

Consequently, the market closely watches his every move. His latest massive short position against the AI sector sends a stark warning shot amid the current euphoria surrounding technology stocks.

The 13F filing, which offers a quarterly snapshot of top money managers’ holdings, revealed a significant portfolio shift for Scion. In Q3, the firm:

• Acquired put options on Palantir with a notional value of approximately $912 million (5 million).
• Acquired put options on Nvidia with a notional value of around $186 million (1 million).

Put options give the holder the right to sell a stock at a specific price in the future, typically indicating an expectation that the share price will fall.

Targeting AI’s Shining Stars

The targets of Burry’s bet are two of the most prominent beneficiaries of the AI boom:

• Nvidia: As the world’s leading supplier of AI chips, it dominates the AI computing hardware market. Its stock has skyrocketed approximately 1,200% over the past three years.
• Palantir: The company provides advanced AI-powered software platforms for data analysis and decision-making to government and commercial clients. It recently reported Q3 earnings that surpassed expectations and raised its full-year forecast. Its stock has surged about 2,200% over the last three years.

Both companies have posted staggering profit growth in recent quarters, driven by robust demand for their AI products.

Market Debate: What Does Burry See?

With the fundamentals of both companies appearing strong, Burry’s bearish move has sparked intense speculation: what unseen risks has he identified?

Burry has become more active on social media lately, repeatedly warning of market bubbles. He recently posted charts suggesting a slowdown in cloud growth, tech capital expenditures reaching levels seen during the dot-com bubble, and an over-reliance on investment from Nvidia and OpenAI within the AI ecosystem.

However, shorting these AI darlings in the current bull market is a high-stakes gamble. Another notable short-seller, Andrew Left, called Palantir overvalued in August, yet its stock has continued to climb. Palantir’s CEO, Alex Karp, directly fired back at Burry following the earnings report, calling his actions “astonishing” and confidently stating he would “cheer for being right” when proven so.

Key Takeaways for Investors

For everyday investors, Burry’s move offers several reminders:

1. Information is Time-Sensitive: The 13F reflects holdings as of the end of Q3; it’s unknown if Burry has since adjusted his positions.
2. No One is Always Right: Even celebrated investors like Burry make missteps. He acknowledged an incorrect “sell” call himself in 2023.
3. Maintain a Long-Term Perspective and Diversify: Burry’s bet should not be taken as a simple signal to dump all AI stocks. In an environment of high overall valuations, investors should focus on companies with solid long-term prospects capable of weathering short-term volatility and ensure their portfolios are adequately diversified.

Whether Burry’s latest high-stakes wager proves correct, his actions serve as a crucial reminder that maintaining a degree of caution and prudence may be just as important as embracing the fervor of the global AI revolution.

AI Funds Semiconductors Technology