Since the Great Recession in 2008, Michael Burry has been one of the more closely followed investors on Wall Street.
As many know, Burry was part of an elite group of investors that saw the housing bubble form in the lead-up to the Great Recession. Burry found ways to bet on the bubble popping by purchasing credit default swaps on mortgage bonds, which is essentially insurance that pays out if the bonds collapse.
Burry and his firm at the time, Scion Capital, would go on to make hundreds of millions on this bet. This series of events was depicted in the movie "The Big Short," in which Burry was played by Oscar-winner Christian Bale.
Image source: Getty Images.
Today, Burry is no longer leading a fund but instead running his own Substack publication, which provides investors with a never-before-seen glimpse into the inner workings of his investment process.
Burry has been pounding the table on the embattled software sector and buying beaten-down names. Does Burry know something that Wall Street doesn't? The famed investor is buying a "Magnificent Seven" stock that is coming off its worst quarter since 2008.
Burry does not believe AI will completely take over
Burry recently announced in a post that he has taken a new position in Microsoft (MSFT +0.19%), one of the largest stocks in the world by market cap. Burry said he sees an opportunity in "bombed out software and payment stocks" and is concerned about parts of the artificial intelligence sector.
While Microsoft is undoubtedly expected to be a beneficiary of AI, the stock seems to be facing headwinds driven by AI-related concerns and also how software will be impacted. In the first quarter of the year, the stock fell 23%, its worst performance since the Great Recession.
The purchase of Microsoft follows recent software-sector purchases by Burry, including PayPal, MSCI, and Salesforce.
While I don't have direct access to Burry's Substack, we know from previous reporting that Burry believes software has struggled due to what he calls a "reflexive positive feedback loop" between declining software stock prices and the stress on software debt associated with these companies. However, Burry does not believe this dynamic can continue for much longer.
While Burry did acknowledge that AI will have serious impacts on several software companies, he is not worried about the stocks he has chosen after conducting a forensic analysis.
NASDAQ: MSFT
Key Data Points
Microsoft specifically has been impacted by broader AI concerns, such as high capital expenditures and elevated valuations. But even more specifically, investors have been disappointed by Microsoft's AI digital assistant Copilot, which is a big part of the company's strategy but has yet to gain the traction investors had hoped for.
On Microsoft's recent earnings call, the company disclosed that it had 15 million paid Copilot seats, experiencing strong annual growth, but this is still only a small fraction of its paid Microsoft 365 users.
Now, supposedly, CEO Satya Nadella has taken charge of Copilot and is working on releasing new features and tools that are off to a good start, so this could be an area that becomes a growth engine, although customers already have many AI assistant options in this market.
Trading at about 25 times forward earnings, I would agree that investors can buy Microsoft here. The company is expected to benefit from AI, and has already seen tremendous revenue growth in its Azure cloud business.
It also continues to operate a diversified cohort of tech businesses that can benefit from AI, or continue their strong success if AI turns out not to be as impactful as expected.
