Julian Vance: Decoding Burry's Billion-Dollar AI Short

Michael Burry, the man who made a fortune betting against the housing market, is back in the spotlight. This time, he’s wagering that the AI boom is overhyped, to the tune of nearly a billion dollars. According to recent SEC filings, Burry’s Scion Asset Management has taken out massive put options—$187.6 million on Nvidia and $912 million on Palantir. The timing is interesting, to say the least.

Contrarian Investing or Market Manipulation?

Burry's latest move raises a few key questions. Is this a calculated contrarian bet based on solid data, or is it an attempt to influence the market with his reputation? After all, his tweet – the first since 2023 – featuring Christian Bale as Burry in "The Big Short," conveniently preceded the disclosure of these bearish positions. The tweet itself was cryptic: “Sometimes, we see bubbles. Sometimes, there is something to do about it. Sometimes, the only winning move is not to play.”

The Nasdaq Composite, which is heavily weighted towards tech, dropped over 2% on Tuesday. The S&P 500 also took a hit, down 1.17%. Was Burry's announcement the sole catalyst? Unlikely. But it certainly didn't help investor confidence (or, perhaps more accurately, overconfidence).

Palantir, in particular, is an interesting target. Their earnings beat expectations, yet the stock still tumbled nearly 8% on Tuesday. As CFRA Research's Angelo Zino pointed out, the company's valuation is "a bit extreme." Palantir shares are still up 152% this year. You might call it a self-fulfilling prophecy (if you were feeling charitable). I call it a calculated risk, which is what this whole game is about. News outlets have covered Burry's recent bets, with some questioning if it's time to get out, as reported by Michael Burry Bet Against Nvidia and Palantir—Is it Time to Get Out?.

The Valuation Question

Here's where my own skepticism kicks in. It's easy to point to high valuations as a sign of a bubble, but what exactly does that mean? Palantir's CEO, Alex Karp, called those betting against his company "crazy," and vowed to "triple down" to prove them wrong. (I've looked at hundreds of these filings, and this kind of bravado is unusual.) But emotional responses aside, let's look at the numbers.

Palantir's forward price-to-earnings ratio is, admittedly, high. But is it unsustainably high? That depends on their future growth, and that's where the debate lies. Burry is betting that the growth won't justify the valuation, essentially calling it a house of cards built on AI hype.

And here’s the part of the report that I find genuinely puzzling. Burry famously shorted the housing market before its collapse. This time, he seems to be betting against the narrative of AI, even as companies are demonstrably increasing their AI spending. Is he too early, as some analysts suggest? Or does he see something that the market is missing? It's easy to forget that he also publicly said "Sell" in January of 2023 before reversing course two months later, admitting, "I was wrong to say sell."

The circular financing of AI deals is another yellow flag. Tech companies are deeply intertwined in a web of investments and partnerships, creating a potential systemic risk. If one domino falls, how many others will follow?

The AI Reality Check

The key takeaway here isn't whether Nvidia and Palantir are good companies. They very well might be. The question is whether their current stock prices accurately reflect their future potential, adjusted for risk. Burry's bet suggests he thinks the market is drastically overestimating that potential.

It's a classic case of "irrational exuberance," to borrow Alan Greenspan's famous phrase. The market is driven by sentiment as much as by fundamentals, and right now, the sentiment around AI is overwhelmingly positive. But sentiment can shift quickly, and when it does, the correction can be brutal.

A Billion-Dollar Reality Check

Burry's track record speaks for itself, but past performance is never a guarantee of future results. His latest bet is a high-stakes gamble on the unsustainability of the AI hype. Whether he's right or wrong, it's a reminder that even the most promising technologies are subject to the cold, hard laws of economics. And that, fundamentally, is what the market comes down to.