"AI Bubble, Pull Out Your Money Now"... Wall Street Prophet's Warning After Two Years [Tech Talk]

Michael Burry Shorts Leading AI Companies
High-Growth AI Firms Perpetually Tagged as a Bubble
"There Are Bubbles, But a Shock Is Needed for Them to Burst"

"Sometimes we witness bubbles. In such times, not participating in the market could be the winning move."

This is a post written by Michael Burry, founder of the American hedge fund Scion Asset Management, on his X (formerly Twitter) account on October 30 (local time). It was his first statement on social media in over two years. Burry is well-known for amassing great wealth through short selling and for predicting the 2008 U.S. financial crisis. Now, he has resumed his activities by forecasting an 'artificial intelligence (AI) bubble.' This has heightened activity not only on Wall Street but also among major big tech companies.

Michael Burry Targets Leading AI Companies Palantir and Nvidia

Burry has put his AI short-selling strategy into action. On November 13 (local time), Burry announced via X that he had entered into put option contracts for 5 million shares of Palantir expiring in January 2027, and for 1 million shares of Nvidia expiring in December of the same year. A put option is the right to sell a stock at a predetermined price. Burry's strike price for the Palantir put options is $50, and for Nvidia it is $110. This means he is betting that the share prices of these companies will plunge by about 70% and 40%, respectively, compared to their current levels.

Burry stated that he held these put options until last month. However, he hinted at further investments, saying, "There will be something better on the 25th."

Michael Burry, founder of Scion Asset Management. Photo by Yonhap News

Burry is often referred to as a legend of short selling. He predicted the subprime mortgage crisis that shook the global economy from 2007 to 2008 and profited by betting on a crash in U.S. stock prices. He had warned about the risks of subprime mortgages-the seeds of the crisis-as early as 2005. His life story was popularized by the 2015 film "The Big Short," which brought him widespread recognition.

Alex Karp, CEO of Palantir, strongly criticized Burry's AI company short selling, calling it "crazy."

Burry's renewed activity has put both Wall Street and global AI companies on high alert. Alex Karp, CEO of Palantir, whom Burry targeted, expressed strong emotions in an interview with CNBC on November 4, calling Burry "crazy." CEO Karp criticized Burry's short selling as "an attempt to cast doubt on the AI revolution," and accused him of "selectively attacking companies that actually support soldiers and help people."

Ongoing Controversy Over the AI Bubble

The debate over an AI bubble is not new. Palantir, which has seen its stock price surge about 25-fold over the past three years, has a price-to-earnings ratio (PER) of 220, far higher than other big tech companies such as Nvidia (33) and Meta (22), fueling persistent doubts about overvaluation. Nvidia has also recently been embroiled in controversy over so-called 'circular trading.'

Last month, Nvidia signed a $100 billion GPU supply contract with OpenAI. Under this deal, Nvidia first invested $100 billion in OpenAI, which then used the funds to purchase GPUs from Nvidia. On November 7, the Financial Times (FT) pointed out that "this is essentially a circular transaction where money moves only between the two companies' books," and added, "For the soaring stock price to be justified, investment returns must be generated, but the problem is that such returns do not yet exist and may never materialize in the future."

Burry also claims that AI companies have inflated their earnings. On November 10, he criticized, "AI hyperscaler (massive data center) companies are excessively extending the useful life of their assets to reduce depreciation expenses," and called it "one of the most common profit inflation tactics in modern accounting."

Typically, GPUs and various computer equipment used in data centers have a useful life of two to three years. However, Burry pointed out that major AI companies such as Google, Meta, Oracle, and Microsoft have extended the useful life to four to six years to suppress costs, predicting, "These companies will understate depreciation expenses by $176 billion between 2026 and 2028."

"There Are Many Bubbles in Tech... But a Shock Is Needed for Them to Burst"

However, even though there is a risk of a bubble in the AI industry, the likelihood of an imminent collapse is low. Unlike other companies that have sparked bubble controversies in the past, most current big tech firms are experiencing rapid growth in both revenue and operating profit. Even if a recession occurs, they are robust enough to withstand it to some extent.

OpenAI's massive data center. OpenAI

Dan Ives, a Wall Street analyst specializing in the technology sector, directly refuted Burry's short-selling bet as "completely wrong," stating, "Palantir's third-quarter results are among the best in IT industry history, and the numbers are almost unreal."

It is also unclear how much Burry has actually shorted AI companies. Hedge funds typically maintain hedging positions-taking opposite positions to protect against investment losses-to defend their returns. There is a possibility that Burry has purchased other assets to offset potential losses from short selling. Moreover, when Burry predicted the subprime mortgage crisis, it took more than two years for the actual shockwaves to hit the market. This time as well, it's possible that Burry has detected the crisis too early and placed his bets prematurely.

Ray Dalio, founder of Bridgewater. Reuters Yonhap News

Some predict that the AI bubble will eventually burst, but at the very least, a shock significant enough to change the economic environment is needed. Ray Dalio, founder of Bridgewater, which was once the world's largest hedge fund, recently acknowledged in an interview with CNBC, "There are many bubbles in the tech industry right now," but also predicted, "The bubble will not burst until a shock occurs, such as a shift to tighter monetary policy."

He warned that the current global economy is strong only in AI-related sectors, while the rest is "relatively vulnerable," and cautioned, "About 80% of market profits are concentrated in big tech. Right now, we are lowering interest rates to support the vulnerable general economy, while speculative capital is flowing into the AI industry, causing the bubble to inflate."