Michael Burry bought his first credit default swaps on subprime mortgage bonds for his Scion Asset Management hedge fund in 2005. He continued to buy those contracts, which offered limited downsides but huge upsides if he was right, even as the trade moved against him. In the end, he turned out to be right about the mortgage-bond crisis he saw coming, and those trades generated hundreds of millions of dollars for his investors.
Burry closed Scion last year, returning invested capital to shareholders. He now manages his own money and writes a newsletter with updates on his portfolio.
Before closing Scion, the fund held put options on Palantir (PLTR +0.53%) and Nvidia (NVDA +2.66%), two tech stocks that Burry sees as overvalued. He continues to hold those options in his personal portfolio. The trade has a similar setup to the "big short" that made him famous. Will it turn out the same way?
Image source: Getty Images.
Burry's $1.1 billion bet against Palantir and Nvidia
In his final 13F filing for Scion Asset Management, Burry disclosed 50,000 put options on Palantir with a notional value of $912 million. He also held 10,000 puts on Nvidia with a notional value of $186,580. Importantly, notional value refers to the value of the underlying shares tied to the options contracts. The actual capital he put at risk is far less, as deep out-of-the-money puts cost just a few pennies per share.
The amount of capital at risk is limited to the amount paid for the puts. That makes Burry's bet against Palantir and Nvidia similar to his bets against subprime mortgages in the 2000s. His potential losses were limited to the premiums he paid on the credit default swaps. In the more recent case, it's limited to the premiums paid on the options. That said, Burry also has smaller short positions on the stocks themselves.
NASDAQ: PLTR
Key Data Points
Billionaire investor Howard Marks once wrote, "Being too far ahead of your time is indistinguishable from being wrong." That's especially true when dealing with options that have an expiration date. Even if Burry turns out to be right, his bets against Palantir and Nvidia could prove worthless because he bought his puts too early.
Burry was early in the subprime mortgage bond short as well. He was able to remain solvent, however, and continued to support his bet against the mortgage bond market until it paid off. I expect he'll do the same with the big AI stocks.
Burry recently sold all his puts on Nvidia and Palantir that expire in December, but maintained short positions in both stocks, and Palantir puts with 2027 expirations. The move was part of a broader portfolio adjustment in which he trimmed every position while maintaining relative sizing to increase his cash holdings and reduce risk.
NASDAQ: NVDA
Key Data Points
Palantir is trading at an extremely expensive premium. While it's producing impressive revenue growth and operating margin expansion, with a price-to-earnings ratio of more than 100, it will need to achieve substantial long-term growth just to justify the stock's current price. Burry has called into question Palantir's ability to keep growing and said the stock -- now priced at about $174 per share -- could be worth less than $1 per share in the long term.
As for Nvidia, Burry believes its heavy customer concentration is a significant risk. If one of the hyperscalers dials back its capital spending plans, that could produce a massive drop in revenue for Nvidia. In the case of a marketwide downturn, Nvidia could be one of the hardest-hit companies.
Burry's bearish bet against Palantir and Nvidia was early, but that doesn't necessarily mean he won't turn out to be right once again.
