Billionaire Michael Burry was profiled in The Big Short: Inside the Doomsday Machine, a book that analyzed the causes and effects of the financial crisis in 2008. Burry made $700 million for clients (and another $100 million for himself) by betting against the subprime mortgages that contributed to the housing bubble.
Today, Burry is the sole portfolio manager at Scion Asset Management, a hedge fund that outperformed the S&P 500 (^GSPC +0.37%) by 20 percentage points during the last three years. Interestingly, his latest Form 13F shows sizable short positions in two popular artificial intelligence (AI) stocks.
- 66% of his portfolio is dedicated to put options in Palantir Technologies (PLTR 1.49%).
- 14% of his portfolio is dedicated to put options in Nvidia (NVDA 1.71%).
Put options bestow the right (but not the obligation) to sell a security at a predetermined price. Investors buy put options when they expect a stock to drop. So, Burry is extremely bearish on Palantir and Nvidia. Here's what investor should know.
Image source: Getty Images.
1. Palantir Technologies
Palantir develops data analytics and artificial intelligence (AI) platforms for customers in the public and private sectors. Its key differentiator is ontology-based software, meaning its products are designed around a decisioning framework made more effective over time by machine learning (ML) models. Use cases span supply chain management to financial modeling to military analytics.
Last year, Forrester Research recognized Palantir as a leader in AI/ML platforms, awarding its platform higher scores than similar products from Alphabet's Google, Amazon Web Services, and Microsoft Azure. "Palantir is quietly become one of the largest players in this market," the analysts wrote. Earlier this year, Forrester ranked Palantir as a leader in AI decisioning platforms.
Those accolades have come alongside financial results that have consistently topped Wall Street's expectations. In the third quarter, Palantir's revenue rose 63% to $1.1 billion, the ninth consecutive acceleration, and non-GAAP earnings more than doubled to $0.21 per diluted share. Management highlighted strong demand for its artificial intelligence platform on the earnings call.
So, why is Michael Burry betting against Palantir? The stock has an outrageously expensive price tag. Shares trade at 143 times sales, the most expensive valuation in the S&P 500 by a wide margin. The next closest contender is AppLovin at 40 times sales. Personally, I would not bet against Palantir as aggressively as Burry (simply because the stock market can be irrational for long periods) but history says Palantir's lofty valuation is unsustainable.
NASDAQ: PLTR
Key Data Points
2. Nvidia
Nvidia dominates the market for artificial intelligence infrastructure. The company is best known for its graphics processing units (GPUs), chips also called AI accelerators because they speed up training and inference workloads. Nvidia holds more than 90% market share in data center GPUs, but the company also leads the market for generative AI networking equipment.
Nvidia is likely to maintain its dominance in AI infrastructure for two reasons. First, it offers a more robust software development platform (called CUDA) than any competitor. Second, its ability to provide rack-scale products -- meaning hardware that integrates compute and networking -- reduces operational complexity and often results in the lowest total cost of ownership, according to CEO Jensen Huang.
Compared to Palantir, Nvidia trades at a more reasonable valuation of 30 times sales. Also, its price-to-earnings multiple of 57 is relatively inexpensive for a company whose earnings are forecast to increase at 36% annually over the next three years. Yet, Michael Burry chose to bet against Nvidia, albeit to a lesser degree than Palantir, which means he anticipates downside.
I can only speculate as to the reasoning, but he may be worried about growing adoption of custom AI accelerators from competitors like Broadcom and Marvell Technologies. Additionally, Burry may be concerned about export restrictions that effectively prevent Nvidia from doing business in China, the second largest AI market in the world. However, while he predicted the housing market crash, he also incorrectly bet against the semiconductor industry two years ago.
In September 2023, 48% of his portfolio was invested in put options against the iShares Semiconductor ETF, but that fund has since advanced 87%, crushing the S&P 500 by 30 percentage points. I mention that not to imply Burry has no clue, but rather to impress upon readers than even smart investors make mistakes. I think his bet against Nvidia falls into that category.
