Michael Burry buys puts on Nvidia, Micron and Palantir as ‘The Big Short’ investor predicts 1987-style stock market crash

Michael Burry is making headlines again as he challenges the bullish narrative around artificial intelligence (AI) stocks. Recently, the famous investor covered his short positions on Nvidia (NVDA +0.52%), Micron technology (UM +0.00%)And Palantir Technologies (PLTR +0.04%) and purchased put options on each of these stocks.

If you only know Burry from The big shortit’s logical. He’s the doctor-turned-investor who noticed something peculiar about the subprime mortgage market years before Wall Street noticed it. His claim to fame was buying credit default swaps that paid off when the housing market collapsed between 2008 and 2009.

It’s still this single trade that speaks most in Burry’s favor, but in reality his record has been more complicated since 2008. He’s been early, loud and often wrong on timing as markets climbed while warning of another crash. While Burry’s ability to read records is impressive, a famous call from 18 years ago is no guarantee of where artificial intelligence (AI) stocks are headed today.

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Today’s change

(0.00%) $0.03

Current price

$1,065.11

Key Data Points

$1.2 billionMarket capitalization calculated only from outstanding publicly traded shares. Does not include non-traded unlisted, private or dual class shares. Implied market capitalization may vary.

Daily scope

$1062.36 -$1083.50

52 week range

$165.50 -$1255.00

Volume

31.1 million

Average flight

34.6 million

Gross margin

72.60%

Dividend yield

0.05%

Is AI a bubble?

As hyperscalers continue to pour capital into chips and data centers at a pace not seen since the dot-com bubble, Burry is increasingly concerned that AI euphoria could fuel a 1987-style crash. Additionally, growth investors assume debt levels are unsustainable and momentum funds pile into an AI-saturated market, pushing the market to expand. S&P500 to record levels. It is for these factors that Burry says an AI bubble could burst “sooner rather than later”.

While I understand his point of view, I think considering the AI ​​revolution as the next dot-com bubble event is an apples-to-oranges comparison. Cisco was a very real business in 2000. The stock only got crushed when customers slowed the pace of their networking hardware purchases. This is one of the main reasons why Burry emphasizes depreciation schedules and chip cycles. If Nvidia GPUs and the servers around them age faster than the books suggest, then profits will look prettier now compared to monetary realities later.

Image source: Getty Images.

Micron is the other half of the chip supply chain. The stock has nearly tripled this year thanks to insatiable demand for high-bandwidth memory (HBM) and DRAM. Tight supply in the memory market gave Micron lucrative pricing power, which translated into juicy gross margins and record profits for the company.

Burry’s thesis is that the old boom-and-bust cycle of memory markets is changing, but that AI is not “different enough” to completely change the way memory manufacturers should be priced. As Chinese supplies increase and Samsung’s new manufacturing facilities, SK Hynixand Micron itself come online, Burry suggests that supply will catch up with demand, which could lead to a predictable down cycle and sell-off.

Meanwhile, Burry repeats an old bear narrative around Palantir, suggesting that the company is not a true software services company and is really just a consulting firm.

All these talking points and risk factors are only half clear. In the late 1990s, many of the Internet’s “darlings” had little revenue and no real path to sustainable profitability. On the other hand, Nvidia, Micron and Palantir are leaders in the sale of hardware and software responding to real and recurring demand from big technologies. Meanwhile, the biggest AI spenders… Alphabet, Microsoft, Amazon, MetaplatformsAnd Oracle — are collectively profitable; they can therefore continue to finance the construction of their infrastructure.

GOOGL Net Income (TTM) Data by YCharts

Burry has a potential conflict of interest

In my view, there is an awkward incentive for Burry to post his transactions on social media. The investor writes a paid Substack newsletter under the name Cassandra Unchained. I’m not saying his process of paying 10K+ and footnotes doesn’t have merit. But a very public bearish megaphone with a subscription fee is beneficial when ordinary investors are lining up to hit the refresh button in anticipation of your next warning. Investors can respect Burry’s duties while remaining attentive to the business model at play here.

I think it’s best for investors to take the predictions of any prominent person with a grain of salt. Burry and many others have been “the boy who cried wolf” often enough that copying their trades is not a viable long-term strategy. The most prudent decision is the most boring: do your own due diligence by reading financial reports and listening to earnings calls. From there, investors can supplement any external opinions they may hear or read with their own personal sentiment before buying or selling a stock.