Should Investors Worry About Michael Burry's Big AI Stock Shorts

Michael Burry became famous for betting on the subprime mortgage collapse, which eventually led to actor Christian Bale portraying him in the film The Big Short. Today, Burry has taken on another target in artificial intelligence (AI) stocks, hoping to profit from a plunge in their share prices.

He has been very vocal about his short positions in Nvidia (NASDAQ: NVDA), Micron Technology (NASDAQ: MU), and Palantir Technologies (NASDAQ: PLTR). The question is whether investors should worry or keep holding these stocks.

Nvidia

Burry's short thesis on Nvidia essentially centers around the economics of AI infrastructure, and whether the investments from hyperscalers (owners of large data centers) make sense. He believes the real economic life of chips is less than three years, given how fast chip technology is advancing.

However, cloud computing giants Amazon and Alphabet have both recently discussed their chip and networking investment economics. Their customers sign up for deals of five years or more, while Amazon is getting a payback within two to three years and Alphabet is getting a payback within two years -- or half that time when it uses its own chips.

Space Exploration Technologies, which is renting out Nvidia graphics processing units (GPUs) for computing capacity on a short-term basis, has been seeing a payback within a year given how constrained capacity is. Meanwhile, according to Bank of America, rental prices for Nvidia's two-year-old B200 GPUs have been on the rise.

Right now, hyperscalers are seeing strong returns on their AI infrastructure investments, and they show no signs that they will slow their immense spending. If that proves to be the case, Nvidia is going to keep benefiting. It's a great company with a durable competitive moat, and with the stock trading at a forward price-to-earnings ratio (P/E) for less than 14.5 times fiscal 2028 analyst estimates, I'd be a buyer.

Image source: Getty Images.

Micron

Burry recently boosted his short position in Micron, and I think his thesis holds more weight than the one for Nvidia. Micron has benefited from a huge surge in demand for high-bandwidth memory (HBM), which gets packaged with GPUs to optimize performance.

However, much of Micron's growth and margin expansion stems from it actually being a laggard in HBM, as the move of manufacturing capacity toward this high-end memory has left ordinary memory in short supply and prices soaring. As the supply demand of conventional memory becomes more balanced, this will hurt Micron.

Burry has admitted that AI has changed the landscape for the historically very cyclical memory market and that this cycle may be different, "but not nearly different enough." Although the stock looks very cheap on a forward P/E basis of less than 6 times fiscal 2027 (ending August 2027) estimates, if pricing, gross margins, and earnings eventually collapse, his short could work.

Whether the bulls or bears will win out will largely come down to how long the memory supercycle lasts and how longer-term contracts will affect the cyclicality of the industry.

Palantir

Another stock that Burry recently added to his short position is Palantir. One of the biggest knocks on it is its valuation, with the stock trading at a forward price-to-sales (P/S) multiple of nearly 57. However, Burry is not shorting the stock on valuation alone.

He has said that Palantir's metrics look more reminiscent of a consultant than a software-as-a-service (SaaS) company, with rising receivables and low deferred revenue. He also believes that improving AI models could threaten the company's competitive moat.

I would counter that by saying Palantir's margins are much more reflective of a top-tier SaaS company. Last quarter, its gross margin was nearly 85%, while its adjusted operating margin came in at 62%.

By comparison, consulting company Accenture had a gross margin of 33% last quarter. Meanwhile, with AI models continually outdoing one another and the rise of open-source models, the importance of a model-agnostic overlay like Palantir's is becoming even greater.

Although its valuation is pricey, Palantir's growth and opportunities are undeniable, and I think it could grow to become one of the largest companies in the world in the coming years.

Bank of America is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Alphabet and Amazon. The Motley Fool has positions in and recommends Accenture Plc, Alphabet, Amazon, Micron Technology, Nvidia, and Palantir Technologies. The Motley Fool recommends the following options: long January 2028 $260 calls on Accenture Plc and short January 2028 $280 calls on Accenture Plc. The Motley Fool has a disclosure policy.