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Michael Burry might not be the first talking head to predict a stock market crash in AI growth stocks, but he might be the most prominent. The American investor made his name by anticipating the 2008 crisis ahead of time. His prescience with regard to the ‘Great Recession’ earned billions for his fund. His portrayal by Christian Bale in the 2015 movie The Big Short was pretty good too.
Now he’s set his sights on the happenings in 2025. His latest moves involve ‘short selling’ two of the biggest AI companies. If the artificial intelligence bubble pops, then he’s going to be quids (or dollars) in. Should investors be worried by this latest prediction from a modern-day soothsayer? Or is this all a bunch of hot air?
Takeaways
Firstly, let’s look at what Burry has been up to. In short, he’s betting on AI stocks Nvidia and Palantir (NASDAQ: PLTR) to go down in value. His fund Scion Asset Management will benefit to the tune of hundreds of millions of dollars if certain conditions are met.
This isn’t traditional short selling however. He has rather bought put contracts, which involve stumping up a small stake but receiving a much larger stake if the share price falls by a certain value. If this sounds like gambling, then I’d say you’re not far off the mark. I’ve never bought puts myself and it’s not something we at The Motley Fool espouse as a good method to build wealth.
The interesting takeaway is that, if his belief in another ‘Big Short’ is justified, then these types of stocks will fall. This might mean investors want to have larger cash positions or diversify away from AI growth stocks in order to not be overly exposed to a crash.
Predictions
One of the stocks Burry is hoping will crater shows the problem quite clearly. Palantir analyses big data sets. The NHS is one of its customers. Artificial intelligence could revolutionise its work in big data too. So far, so good. But what’s the issue?
Palantir is a $445bn company with $3bn revenue and $500m earnings (numbers from last financial year). Investors are paying incredible amounts for meagre profits. To contrast with a more traditional company (albeit far from a like-for-like comparison), FTSE 100 stock Tesco is a £30bn company with £70bn revenue. These extravagant numbers are why many are expecting a crash.
In defence of Palantir, I will say that the best growth stocks almost always come with elevated valuations. The price-to-earnings ratios of Apple and Amazon have flirted with the three-digit mark this century, and both of those ended up making a lot of wealth for early investors.
That said, the numbers of Palantir eclipse those of almost any point in history. It even dwarfs some of the eye-watering valuations going around before the dotcom bubble. For this reason, I couldn’t call it a stock to consider. And I wouldn’t be surprised to see predictions from Michael Burry come true.
