Investor Bets $1.1 Billion Against AI Giants, Shaking Markets

Investor Michael Burry has taken a significant stance against major players in the artificial intelligence sector, betting $1.1 billion against Nvidia and Palantir Technologies. His strategy involves massive put options, which now represent 80% of Scion Asset Management’s portfolio as of September 30. This bold move has sparked conversations about the current market situation, suggesting that AI stocks may be operating in bubble territory.

Burry’s Market Impact

Burry, known for successfully predicting the 2008 housing crisis as depicted in “The Big Short,” publicly disclosed his short position on Monday. This announcement led to an immediate sell-off in tech markets. Palantir’s stock plummeted as much as 16% on Tuesday before settling down around 8%. This decline occurred despite Palantir surpassing third-quarter earnings estimates and raising its full-year guidance.

Nvidia also experienced a sell-off, with its stock falling between 2% and 4% during the same trading session. The Nasdaq Composite Index recorded its largest one-day percentage drop in nearly a month, declining approximately 2%. Notably, every member of the “Magnificent Seven,” a group of prominent AI-related stocks, closed lower that day.

Global Market Reactions

• Asian and European markets also felt the repercussions, with significant declines in Tokyo and Seoul.
• Investors globally are expressing concerns over tech valuations.

The severe decline in stock prices of Nvidia and Palantir highlights growing caution among investors regarding AI investments. Palantir, currently trading at a price-to-earnings ratio of about 254 and a price-to-sales ratio of around 115, appears particularly sensitive to continued bearish trends.

Nvidia’s Resilience

In contrast, Nvidia, which holds about 80% of the AI chip market, experienced a more contained sell-off. Unlike Palantir, Nvidia’s stock remained above its 50-day moving average, leading analysts to view its fundamentals and market position favorably.

Despite the temporary fears easing, neither Nvidia nor Palantir has returned to their previous all-time highs. Burry’s short position has injected volatility into the AI sector, making investors wary of buying at inflated valuations.

Broader Market Concerns

This short position coincides with warnings from Wall Street executives. CEOs from Morgan Stanley and Goldman Sachs have advised investors to brace for potential corrections of 10% to 20% in equity markets over the next couple of years. Additionally, Deutsche Bank is reportedly seeking strategies to hedge its exposure to AI investments.

Responses from Industry Leaders

Burry has raised concerns about “circular financing” in tech, referring to the interconnected investments major companies make in firms like OpenAI. Analysts from Seaport Global Securities have characterized such financial arrangements as indicative of bubble-like behavior.

In a pointed retort, Palantir CEO Alex Karp dismissed Burry’s position, labeling it “batshit crazy.” He asserted that the scrutiny from Burry would drive his company to enhance its performance, stating it would aim to make short-sellers “poorer.”

Investor responses indicate that Burry’s warnings are being taken seriously, with many seeking to reduce risk in speculative areas of the AI market amidst the prevailing technical valuation extremes.