Warren Buffett and Michael Burry are two of the most famous investors in modern history. While both have amassed enormous wealth, they share little in common when it comes to their respective investment strategies.
This dichotomy is on full display at the moment, as recent 13F filings reveal that Burry is shorting artificial intelligence (AI) stocks Nvidia (NVDA 2.13%) and Palantir Technologies (PLTR 3.05%), while Buffett just plowed more than $4 billion into Alphabet (GOOGL 2.34%) (GOOG 2.45%).
Let's break down the underlying features of their latest moves in an attempt to assess which billionaire made the right choice, and to answer the question: Should you buy or sell AI stocks right now?
Image source: Getty Images.
Michael Burry's latest big short
In simple terms, when an investor shorts a stock, they are betting that its price will decrease. One common way to construct a short trade is to buy put options on the stock you're bearish about.
According to the most recent 13F filing from Scion Asset Management, the hedge fund Burry manages, during the third quarter, it purchased 5 million shares worth of put options for Palantir and 1 million put options for Nvidia. In total, these contracts are worth roughly $1.1 billion.
In my view, there are two primary reasons Burry went short on those stocks in particular.
With Palantir, Burry's concern is likely its lofty valuation. As of Nov. 19, Palantir sported a price-to-sales (P/S) ratio of 107. Not only is this a hefty premium for the software sector, but it is also historically high when benchmarked against prior technology megatrends.
For instance, during the height of the dot-com bubble, the P/S ratios of internet pioneers such as Microsoft, Cisco, and Amazon peaked in the range of 30 to 50. Given how much further Palantir's valuation has climbed beyond those excessive levels, it could be argued that the data analytics specialist is due for a pullback. Its current valuation appears unsustainable.
NASDAQ: NVDA
Key Data Points
With Nvidia, Burry's concerns are tied to a more subtle detail. The chipmaker is the market leader in graphics processing units (GPUs), advanced parallel processors that are widely used to develop and power generative AI applications.
Over the last few years, hyperscalers have laid out hundreds of billions of dollars to buy as many of Nvidia's GPUs as possible. Where things become more complicated is how all this hardware is being accounted for on paper.
Let's say a company expects the GPUs it buys to have a useful life of five years. If it spent $1 billion in a given year to procure these chips, then the business would generally depreciate this purchase ratably -- in five annual installments of $200 million -- over that estimated useful life. Because depreciation is treated on the books as an expense, that theoretical depreciation figure of $200 million will cut into the company’s reported earnings each year. This lowers its bottom-line figure for that year accordingly.
In reality, however, Nvidia has been releasing new chip architectures every other year since before the AI revolution kicked off, and in 2024, it accelerated its pace to an annual cadence. Against this backdrop, the true product life cycle of its GPUs might be only two or three years.
For now, though, with companies depreciating these expenses over longer horizons -- five or six years, in some cases -- they reduce the size of the annual expenses they have to report relative to depreciation, which makes their profits appear higher.
Burry is essentially accusing Nvidia and its customers of accounting fraud supported by artificially inflated profit margins.
The one magnificent stock Buffett just bought
During the third quarter, the only stock that Buffett and his portfolio managers added to Berkshire Hathaway's portfolio was Alphabet.
This was an interesting move, as Buffett had been trimming technology positions such as Apple for more than a year. Moreover, Berkshire has kept its stock purchases fairly muted recently, so its sales left it with a record cash stockpile.
In Q3, for the first time since the AI revolution began, the Oracle of Omaha finally decided to partake. Adding to the curiosity, Alphabet arguably sits at the intersection of Burry's two concerns -- valuation and accounting gimmicks.
On the valuation side, Buffett is notorious for not chasing hype or paying premium prices for investments. Given that the S&P 500's Shiller CAPE ratio level of 40 is dangerously close to levels last seen during the dot-com bubble, a solid argument could be made that the market isn't just frothy -- it's overvalued. And AI stocks are the largest contributors to that condition.
S&P 500 Shiller CAPE Ratio data by YCharts.
Even so, Alphabet trades at a forward price to earnings (P/E) multiple of 28 -- the second-lowest among the "Magnificent Seven." With that in mind, shares of Alphabet could be seen as somewhat of a value play relative to the rest of its cohort.
When it comes to the accounting issues, I don't think Buffett is too concerned. He's a high-level thinker. What I mean by that is Buffett made his fortune investing in durable businesses that generate consistent profits and reward shareholders through dividends and stock buyback programs.
In other words, Buffett does not appear to be overly analytical when it comes to the specifics of a company's generally accepted accounting principles (GAAP) financial reporting. The team at Berkshire is likely well aware of the accounting mechanisms employed by big tech, and it's more than able to adjust its own models to perform what it views as accurate forecasting.
The verdict: Buffett and Burry have different mindsets
At the end of the day, Buffett and Burry are taking different approaches to the AI trade.
While both are contrarian investors, Burry should be thought of as a trader -- he looks to identify anomalies or momentum opportunities that he can capitalize on. By contrast, Buffett invests for longer periods in businesses that have brand recognition and diverse ecosystems.
As a long-term investor, I am more inclined to follow Buffett's playbook. Choosing companies to buy and hold forever is a proven, time-tested approach to compounding wealth.
While Burry may mint some short-term profits by betting against the AI pure plays, I think Buffett is better positioned for long-term gains.
