Michael Burry Is Staying Short Nvidia, Palantir, and Tesla, Warning of a Possible "1987-Type Fall" for AI Stocks. Should Investors Take the Bet Seriously?

Michael Burry, famous for his depiction in The Big Short, has set his eyes on artificial intelligence (AI) stocks. He's short Nvidia (NASDAQ: NVDA), Palantir (NASDAQ: PLTR), and Tesla (NASDAQ: TSLA) and sees the AI bubble leading to a "1987-type fall."

Writing in his Substack newsletter, Burry recently brought up a valid point about leverage, but his concerns about an AI bubble are vastly overblown. Here's what investors should know.

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Leverage is a concern for people who need money soon

Burry noted that a rising stock market forces certain funds to go deeper into leverage. For instance, the GraniteShares 2x Long NVDA Daily ETF (NASDAQ: NVDL) is forced to buy more shares of Nvidia as the chipmaker rallies.

It's not just these funds, either. Margin investing is hot, and the total margin debt increased by 50% year over year in June. That type of leverage accelerates rallies but can lead to harsh, sudden crashes.

The risk of that level of margin was put on full display when Leopold Aschenbrenner's highly leveraged Situation Awareness hedge fund was liquidated due to declining stock prices. The fund had high-leverage bets on hot AI stocks. While most investors with long-term horizons can recover from a 20% dip, those same dips are devastating for investors like Aschenbrenner.

In the end, his $45 billion hedge fund liquidated almost overnight, catching the entire world by surprise and explaining why AI stocks had been slumping for weeks.

Even if you do not use leverage on AI stocks, you may still be affected by other people's leverage, since margin calls can force people to sell out of positions and turn small corrections into big ones.

Long-term investors shouldn't be worried

The AI boom is fueled by real demand, revenue, and profits. People are adopting AI models like ChatGPT and Gemini. Chatbots are becoming more common, and physical AI, such as humanoid robots and autonomous vehicles, is gaining traction.

It's not like the dot-com bubble, where companies had sketchy fundamentals and questionable long-term growth prospects. Furthermore, the margin unwind connected to Situational Awareness suggests there won't be a dramatic 1987-style event. There may be a good buying opportunity for patient investors.

Although Burry made a great call leading up to the recession that catapulted him to fame, he has repeatedly warned investors about stock market crashes that have never materialized.

Burry may have profited in the short run with some of his positions since he often uses puts. However, staying out of the market and avoiding growth stocks has hurt people in the long run.

Burry isn't right all the time, and when he makes bold bets, he's often thinking in months rather than years, since put options have expiration dates. It may also be the case that a broken clock is right twice a day. Burry disclosed a short position in Nebius Group (NASDAQ: NBIS) on Aug. 6. The neocloud then delivered superb earnings and is up roughly 20% since that disclosure.

The market's love of leverage is a risk that can affect the entire market, with an outsized impact on growth stocks. However, the fundamental story for AI is solid and strengthening.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.