Does Michael Burry of "The Big Short" Fame Know Something Wall Street Doesn't? He Just Made a Billion-Dollar Bet Against 2 Companies Driving the AI Boom.

Michael Burry has proven his ability to identify a bubble. Back in the early 2000s, the hedge fund manager considered trends in the U.S. housing market unsustainable -- and decided to short this market, betting on a decline.

Amid the subprime mortgage crisis that unfolded, he collected more than $700 million for his clients thanks to that move. And Burry gained additional fame when Hollywood told the story in The Big Short a few years later.

Since that time, investors have closely watched Burry's moves, as they recognize his strength in spotting clues that may not be noticed by everyone. And as illustrated by his bet against the housing market, Burry isn't afraid to go against the crowd.

All this means that Burry's latest move -- concerning one of today's fastest-growing markets -- is likely to attract investors' attention. I'm talking about artificial intelligence (AI), a market forecast to grow from the billions now to more than $2 trillion by the end of the decade. Burry recently bet against two companies driving the AI boom. Does he know something Wall Street doesn't?

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Michael Burry's 13F

So, let's jump right in and consider this top investor's latest moves, shown in his 13F filing with the U.S. Securities and Exchange Commission. These are filings managers of more than $100 million in equities must submit on a quarterly basis -- and this is great for the rest of us investors, as it offers us a glimpse into the strategy of some of the world's most successful money managers.

In the third quarter, Burry bought $186 million in put options on Nvidia (NASDAQ: NVDA) and $912 million in put options on Palantir Technologies (NASDAQ: PLTR) for his Scion Asset Management portfolio, totaling a more than $1 billion bet against these AI giants. A put option, allowing the holder to sell a particular stock at a specific price at a future date, is a bet that the stock price will fall.

This move is striking because Nvidia and Palantir both have generated tremendous earnings growth in recent quarters, thanks to demand for their AI products and services, and are known as key companies in this AI revolution. Nvidia, selling the world's top-performing AI chip, dominates that market, while Palantir offers software systems that allow customers to easily apply AI to their needs.

Palantir's explosive growth

In the third quarter, Palantir delivered double-digit gains in revenue and strong profitability and increased forecasts across the board for the full year. Nvidia is expected to release quarterly earnings later this month, but it's reported record revenue and high profitability on sales recently. Palantir's and Nvidia's stock performance has reflected this success, with the shares climbing 2,200% and 1,200%, respectively, over the past three years.

In spite of these bright earnings reports, though, Burry's third-quarter moves suggest he expects both Palantir and Nvidia stock prices to decline. So, we might wonder: Does Burry know something Wall Street doesn't?

Is an AI bubble forming?

In recent weeks, investors have debated whether a bubble is forming or has formed in the AI market, and that's even weighed on stock performance during certain trading sessions. But tech companies' earnings so far have been strong, and forecasts for growth ahead are encouraging -- so, even if we see some declines in the near term, the long-term picture remains bright. And this means investors could win by holding onto quality companies, such as Nvidia and Palantir, for the long haul.

As for Burry's bet, it's important to keep a couple of things in mind. He made this move in the third quarter, and we don't know if he's maintained it in recent weeks -- we also don't know if this bet is a short-term or long-term one.

And Burry -- like any investor -- isn't always right. Back in 2023, he posted "sell" on X, then a couple of months later said that he had been wrong.

So, what does this mean for investors? Burry's move doesn't mean you should sell or avoid all AI stocks. Instead, at this time as valuations overall have climbed, it's a great idea to maintain positions in stocks -- in AI or other industries -- with solid long-term stories, ones that could withstand potential near-term turbulence and still generate growth in the years to come. And at the same time, ensure that your portfolio is well diversified.

Whether Burry is right or not, these moves should help you manage any short-term headwinds -- and win over the long run.

Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.