Michael Burry's AI Short: Genius or Just a Hunch?
Michael Burry, the man Christian Bale portrayed in "The Big Short," is making waves again. This time, he's betting against AI, specifically Nvidia and Palantir, to the tune of $1.1 billion. The news triggered a tech stock sell-off, particularly in Asia, with Japan's Nikkei 225 taking a serious hit, dragged down by SoftBank's plunge. Is this a sign of an impending AI bubble burst, or just Burry being Burry?
The Data Behind the Doubt
The market's reaction highlights a growing unease about AI valuations. We've seen massive investments, like Amazon's $38 billion deal with OpenAI, pushing stock prices to record highs. But are these valuations justified by actual earnings? Burry seems to think not. He even posted on X, stating, "Sometimes, we see bubbles. Sometimes, there is something to do about it. Sometimes, the only winning move is not to play." Cryptic, but the message is clear.
Nvidia, despite recently hitting a $5 trillion valuation, dropped nearly 4% after Burry's short was revealed. Palantir, another AI darling, also took a hit. The question is whether this is a temporary correction or the start of a larger trend. Farhan Badami, a financial analyst, believes the correction will continue, arguing that "some of the super-high valuations out there aren't making sense." He points to high spending within AI firms that isn't always matched by revenue.
SoftBank's struggles further complicate the picture. The company has poured billions into AI development, making it particularly vulnerable to shifts in market sentiment. As Vincent Fernando from Zero One puts it, the surge in SoftBank's shares was a "double-edged sword," attracting investors but also leaving the stock exposed to pullbacks. The market's concern, he says, is whether SoftBank is "overspending on AI and won't make a sufficient return on that spend."
A Contrarian's Playbook
Palantir's CEO, Alex Karp, predictably isn't thrilled with Burry's bet. He called it "batshit crazy," pointing out that the companies Burry is shorting are actually making money. He highlighted Palantir's Q3 revenue gain of $1.2 billion, up 63%. But here's where it gets interesting. While the revenue growth is impressive, Palantir's market cap is a staggering $450 billion. This means investors are paying a hefty premium for each dollar of revenue (a price-to-sales ratio of over 100). Is that sustainable?
I've looked at hundreds of these filings, and this kind of valuation discrepancy is what often precedes a correction. It's not about whether the company is good; it's about whether the market has priced in too much future growth.
The broader context is crucial. According to Bank of America analysts, tech stocks contributed over 90% of the S&P 500's total return in October. The "Magnificent Seven" alone accounted for 80%. This concentration of gains in a narrow group of stocks makes the market vulnerable to a selloff if investor sentiment shifts. And shifts it clearly has. As reported by the BBC, the news of Burry's short positions triggered a sell-off in AI tech shares. Trader who inspired The Big Short sets off AI tech share sell-off
Is Burry right? Only time will tell. But his bet serves as a stark reminder that even the most promising technologies are subject to the laws of financial gravity. Valuations need to be grounded in reality, and hype alone can't sustain a market forever.
A Reality Check
Burry's short isn't just a bet; it's a data point that deserves serious consideration. The market's knee-jerk reaction proves that the AI narrative, while powerful, is also fragile. Time to look past the buzzwords and examine the underlying fundamentals.
