Michael Burry's Bets Against AI Stocks Nvidia and Palantir: What Investors Should Know

The S&P 500 and tech-heavy Nasdaq Composite indexes declined by about 1.6% and 3%, respectively, this week. The Dow was also down over 1%. This was the Nasdaq Composite's worst week since April, when investors were rattled by President Donald Trump's announcement of the so-called "reciprocal tariffs."

There were likely a couple of factors that concerned investors this week. But the one that most spooked them was apparently well-known hedge fund manager Michael Burry's revealing, via a Securities and Exchange Commission (SEC) filing, that his Scion Asset Management fund instituted bearish bets on popular artificial intelligence (AI) stocks Nvidia (NASDAQ: NVDA) and Palantir Technologies (NASDAQ: PLTR) in the third quarter, which ended on Sept. 30.

Burry filed the SEC 13F Form on Monday after the market close, and its market-moving effects began on Tuesday.

Image source: Getty Images.

What is an SEC Form 13F?

Fund managers are required to file an SEC Form 13F, which shows their investment holdings, 45 days after the end of each quarter. Burry filed on Nov. 3, about a week and a half before the deadline.

Why was Michael Burry able to move the market?

Some investors apparently see Burry as a stock forecaster worth listening to because of his prediction and actions preceding the financial crisis of 2007-2008. He shorted the market due to concerns that a subprime mortgage crisis would occur and drag down the market. Such a crisis did occur, which led to the Great Recession. Burry -- who is a billionaire -- and his investors made a lot of money from his short bets.

Details on Burry's bearish bets on Nvidia and Palantir

I've seen it reported that Burry "shorted" Nvidia and Palantir stocks. This is inaccurate. His bearish bets on these stocks were made by buying puts, which are options. I won't get into technicalities, as the differences between the two don't seem relevant here. The bottom line is that short-sellers and put buyers are both betting a stock will decline.

In Q3, Burry bought 1 million Nvidia put options with the underlying stock valued at $186.6 million at the end of the quarter. He apparently is much more bearish on Palantir, as he bought 5 million Palantir put options with the underlying stock valued at $912.1 million at the end of the quarter. (A standard contract for options is 100 shares of the underlying stock.)

SEC Form 13F filings don't show details beyond this, so we don't know the exact dates of Burry's transactions, the costs of his put option contracts, or the expiration dates for the contracts.

For context, along with the two put option contracts, Burry's fund owned six stocks worth about $283 million at the end of Q3. In order of largest holding first, these are pharmaceutical giant Pfizer, energy behemoth Halliburton, health plan provider Molina Healthcare, high-end athleisure wear company Lululemon Athletica, consumer-banking company SLM Corp -- commonly known as Sallie Mae -- and Bruker Corp, which sells scientific instruments and analytical solutions.

How much were Nvidia and Palantir stocks down this week?

Shares of AI semiconductor (or chip) leader Nvidia declined 7.1% this week, while shares of Palantir, which operates an AI-driven data analysis platform, were down 11.2%. Both stocks were up on Monday, and then hit by the Burry news on Tuesday. From Tuesday through Thursday, Nvidia dropped 9.1%, and Palantir fell 15.5%.

The good news for investors is that both stocks stabilized on Friday. Nvidia stock opened down on Friday but steadily climbed and ended the regular trading session up by 0.04% (essentially unchanged). Palantir stock gained 1.6% on Friday. For context, on Friday, the S&P 500 edged up 0.1%, and the Nasdaq Composite edged down 0.2%.

Given Friday's action, I think what some investors like to call "the weak hands" (the stock owners who are feeling ambiguous about owning that stock) may have already been shaken out of Nvidia and Palantir. In other words, I think the "Burry effect" could be over.

What should investors in Nvidia and Palantir stocks do?

My advice is to maintain whatever your positions on Nvidia and Palantir stock were -- be they bullish, neutral, or bearish -- before the Burry news broke. Some investors give too much power to headlines screaming that this or that "billionaire hedge fund manager" bought or sold or shorted this or that stock.

First, just because someone is a billionaire or a billionaire hedge fund manager doesn't mean their stock-picking is any better than yours. Indeed, some of the big hedge funds' relatively recent performances are nothing to write home about, so to speak. Frankly, from what I've seen, many of them were late to recognizing how important AI would be to the economy and stock market and, therefore, late to buying stocks such as Nvidia.

Second, most of the big-name hedge fund managers know their words have power over some investors, so they use that power to profit. By advertising, so to speak, via not just SEC filings but also by doing interviews, a hedge fund manager's bearish (or bullish) bet on a particular stock can become kind of a self-fulfilling prophecy.

I think Burry's bearish bet on Nvidia stock will be a losing bet. (I won't offer an opinion on Palantir, as I'd want to know the put option contract expiration date before offering an opinion.)

SLM is an advertising partner of Motley Fool Money. Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Bruker, Lululemon Athletica Inc., Nvidia, Palantir Technologies, and Pfizer. The Motley Fool has a disclosure policy.