A Major Contrarian Play

Michael Burry, the investor renowned for his successful bet against the housing market before the 2008 financial crisis, has turned his attention to the artificial intelligence sector. His hedge fund, Scion Asset Management, recently acquired $1.1 billion in put options against semiconductor powerhouse Nvidia and data analytics firm Palantir, signaling a belief that their high-flying stock prices are due for a correction.

The move, revealed in a quarterly filing, is heavily weighted against Palantir, with $912 million in puts, while the position against Nvidia totals $186.6 million. Put options grant the holder the right to sell a stock at a predetermined price, becoming profitable if the stock’s market value falls. This strategy is a hallmark of Burry’s investment approach, which often involves taking significant positions against assets he deems overvalued.

Extreme Valuations Fuel the Wager

At the heart of this bet are the soaring valuations of both companies. While Nvidia has seen explosive growth, Palantir’s metrics appear particularly stretched. Palantir trades at a price-to-earnings (P/E) ratio of 417 and a price-to-sales ratio of 116. In contrast, Nvidia, despite its own massive run-up, has a P/E ratio of 53 and a price-to-sales ratio of 28.

The AI sector’s rapid expansion has pushed the collective market value of the top U.S. tech companies to $23 trillion, a figure approaching the entire U.S. Gross Domestic Product (GDP) of $29 trillion. This concentration of value has led some analysts to draw parallels with previous market bubbles, a sentiment Burry seems to share. Both Nvidia and Palantir saw their stock prices decline after news of Scion’s positions became public.

Broader Market Jitters

While the AI boom is driven by real technological advancement and significant investment from companies like Amazon and Meta, Burry’s move is a high-profile challenge to the sector’s current momentum. His concentrated bet suggests a strong conviction that the market has become overly optimistic, overlooking fundamental valuation concerns. If prices don’t fall, the options will expire worthless, but a significant downturn could yield substantial returns for his fund.

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