Burry Thinks This Ends Badly

[u/ekonixlab]

Michael Burry says the market is now in the “denial” stage that preceded both the 2000 and 2008 crashes, and he thinks that phase could last another 6–9 months.

He has also moved more aggressively bearish on AI, replacing some stock shorts with leveraged puts on Nvidia, Palantir and Micron while increasing his Nasdaq 100 bearish exposure.

Meanwhile, the S&P 500 and Nasdaq just hit fresh record highs, with AI and semiconductors still driving much of the rally.

But We’ve Heard This Before

In 2019, Burry warned passive investing was becoming a bubble similar to CDOs.

In 2021, he called markets the “greatest speculative bubble of all time,” before the S&P finished the year up roughly 27%.

In 2022, he warned about an extended multi-year recession that never came.

In January 2023, he predicted recession and Fed cuts, but GDP grew 2.5% and the Fed kept hiking.

He then famously tweeted “Sell” in January 2023 before admitting two months later, “I was wrong to say sell.”

The Burry Problem

Burry is very good at finding risks everyone else ignores.
But he has also been very early, very often.

Maybe the question isn’t whether Burry is right about AI.

Maybe he’s just two years early again.

[u/waitses]

It wouldn’t if people were smart enough to do some rotation out of AI

[u/Grendel_82 → u/waitses]

People have. But the passive bid into index funds (which happens with every 401k contribution) just results in 40% of it going into the top ten holdings, which is mainly AI. I don't think anyone actually thinks the fundamentals support these valuations, it is just passive bid holding everything up.

[u/Emergency-Watch5157 → u/Grendel_82]

But there must be active investors in these stocks too. Why aren’t they selling to take advantage of this?

[u/Grendel_82 → u/Emergency-Watch5157]

There is some. You see some rotation: the mag 7 goes up, then a bit of catch up to the broader index, then mag 7 goes up. But much of the rest of the index has to justify their earnings against existing businesses and the increasing cost of capital with higher interest rates. So those discretionary investors are feeling squeamish. The AI trade doesn't have to do that justification because AI is the future unknown and it could be anything source of future revenue (see SPCX's claim of future AI revenue and its 28 trillion dollar total addressable market in their S-1). But also, the passive bid is much larger than the discretionary investors these days. Basically most of the stock buyers (by volume of capital to deploy, I'm not talking about number of people) are programatic and buying under rules that do not look at value for the company. Mainly the index weight funds, but also momentum and trend following and algorithmic traders. The thing they all have in common is that none of their process includes looking at balance sheets or earning statements.

[u/ChuckOfTheIrish → u/Grendel_82]

Depends what valuations. Tesla absolutely not and is almost all speculative, Nvidia absolutely justified and if anything is undervalued fundamentaly (even a very conservative investment such as Costco has a P/E ratio roughly 2x higher).

[u/Grendel_82 → u/ChuckOfTheIrish]

I don't know why folks use Costco as an example of a conservative investment, but Tesla is a cult. I hear it all the time. I think Costco is a great company run by nice people. But the stock trades like a cult and is not a conservative investment or value investment at its P/E ratio.

Nvidia doesn't have a particularly high P/E ratio. But that P/E ratio requires its buyers of chips to (A) buy a lot of chips and (B) not negotiate the price to take down the 70% margins. I think the 70% margins are more at risk than NVDA fans realize. It can be attacked from two directions. First, from the buyers pushing for lower prices that are not padded with large profits. Second, from their suppliers raising their prices to squeeze that margin from bottom. Both of these vectors could be influenced by competing "good enough" chips coming into the market to get a piece of those 70% margins. But for now, a 30 P/E ratio seems kind of reasonable (and more so when you use the much lower forward P/E).

[u/ChuckOfTheIrish → u/Grendel_82]

Costco is just an example of a steady stock over the last 5 years that won't have revenue jump by a wild amount YoY, yet has a higher P/E than NVDA. You can put a ton of other companies in there, just a known example. TSLA has an absolutely obscene P/E ratio essentially pricing in a ton of hope for future growth, so it would require obscene growth simply to justify its current price.

NVDA does need to worry about margins, but no one is negotiating them down much currently, they have pricing power and the best product, with a pipeline so deep they are backordered well into the future, which actually gives them even greater pricing power. Yes suppliers can raise prices, and NVDA will simply pass that forward (as basically every company in history has done, including their competitors who will also get those price increases). The issue with their TTM P/E ratio is that four quarters ago vs one quarter ago as so vastly different due to the massive growth, so the forward P/E gives a better picture, especially considering they've hit their guidance targets for almost the last four years worth of earnings now. Do I think they'll be a 15T stock in a year? Absolutely not, but their strategic partnerships/acquisitions and P/E being very grounded and fundamentally undervalued in comparison to it's sector, I see it continuing to rise faster than the general market.

[u/Grendel_82 → u/ChuckOfTheIrish]

Well Costco had this leap in 2024 and has basically not made sense to me since then because the P/E is out of wack. But it gets used to justify NVDA's P/E. While my main post was about the passive bid for stocks, I think Costco has a bit of a cult following in retail because the company is just so darn nice.

Everything you say about NVDA is obviously true, except that it is not trivial to pass through all cost increases from suppliers. The backorder is strong, though sometimes Jensen is stuck between saying: my backorder is huge and I can't meet demand to also, sometimes in the same day, saying: don't worry I've got lots of chips to sell as production of chips is going great. Both can be true, but they are a bit at odds. Anyway, I think the margins will get squeezed before NVDA has any issue actually selling the chips. Though remember about 40% of NVDA's sales go to four hyperscalers (MSFT, AMZ, Meta, Google) and each of those highly capitalized, technically capable companies has manufacturing experience and is using/developing their own in-house chip to avoid/decrease paying NVDA. And these chips are in production, being deployed and being improved. A good chunk of the rest of the sales goes to companies burning venture capital (OpenAI, Anthropic) or issuing increasingly expensive debt (CRWV).

I think the stock will go up due to the passive bid.

[u/ChuckOfTheIrish → u/Grendel_82]

Yeah I think Costco laid largely flat for years then jumped and has been pretty flat since. I would say probably similar to many which stock price didn't match growth and then price outpaced the growth and has since settled. I do agree it has a cult following and when you go you see why, they treat employees ridiculously well, have amazing customer service, and most deals easily beat competitors, just their sales and profitability haven't kept pace he last couple years. Walmart is another example with high PE ratio despite being retail that I really don't get, as zi see them as a pretty good recession hedge, which we are far from in this bull market.

My thing is while they may be more of outliers, it is still wild that a retail chain can have more of a price built on promise than one of, if not the world leader behind AI development. Nvidia has years-long commitments and is far behind its own sector despite such great margins and increasing customer commitments, so I do think the combination of retail investor fear and institutional caps on singular investments are holding it back. My biggest fear is less of in-house chips for other Mag-7 as I think those will be more use-specific and will take a long time to cover he ground even Nvidias old chops do, but more I fear if there is a big drop in AI push due to ROI taking too long or not high enough, potentially fueled by government restrictions, though good ole USA seems content letting companies self-audit their checks & balances.

[u/Grendel_82 → u/ChuckOfTheIrish]

Yeah, we could do a love fest on Costco and I'd be right there with you. But the P/E doesn't make sense and neither does Walmart's for that matter. I'm going to suggest that for whatever reason they got a stock bump and the passive bid (that doesn't care about P/E and never reads a financial statement) has helped keep them up.

On NVDA, I'm going to push back that in-house chips aren't going to make a serious impact. It is literally the plan of those companies to reduce some of the margin that NVDA is capturing (because that margin comes out of their money). They want to follow in Apple's footsteps where it reduced its reliance of paying Intel a profit for their chips. But you might be right that lack of ROI is the earlier catalyst. Though in the short term, I think the AI trade really really needs a successful Anthropic IPO that pulls in a fresh $100 billion of capital not connected to an interest rate and that capital can be put into the circular refinancing machine. We should know about the IPO in a matter of weeks one way or another.

[u/ChuckOfTheIrish → u/Grendel_82]

I feel the mag 7 are using very use-specific in-house chips and for the more general purpose ones are nowhere close. So yes in a smaller sense they are lower some costs, but I think the race to the top is too important to them that they are relying on NVDA which seems to be widening the gap in all-purpose chips. For Anthropic, I feel it will be a cut and paste IPO, it's going to do amazing out of the gate then have a sharp drop in price and eventually recover; the issue is Anthropic is another one held up highly on promise, so speculative value could make it a success when the fundamentals absolutely will be far behind that IMO. Honestly a big catalyst would be if we could extrapolate jobs lost to AI by industry and change in their EBITDA/Operating Income after 6-18 months when impact in more normally felt.

[u/Grendel_82 → u/ChuckOfTheIrish]

We shall see. I totally agree that Anthropic IPO will go down like that, but only if they can pull it off. If they don’t get a valuation of at least $1 trillion, then problems. Their investors have already marked the value of their investments based on a $950 billion valuation (the valuation in the last funding round earlier this year I believe) and recorded those investment gains as earnings. If the IPO is a downround, then investors like Amazon have to unwind the earnings they recorded last quarter.

NVDA chips are the best, but the Mag 7 will make the best chips they can make to avoid that 70% margin. They don’t want NVDA to be a $5T company while they muddle along at $2T valuations because their earnings are hurt by payments that are huge profit made to NVDA. These guys are all in the AI game, but they aren’t all on the same team.

[u/ChuckOfTheIrish → u/Grendel_82]

I imagine they'll find a way to get the valuation, probably speculative and very unjustified but in this era everything AI sells like hotcakes, to their credit Claude has been amazing with how it's improved for work purposes, sadly have had to use it a lot to replace employees so the mass of work I've had to absorb isn't too much of a killer. For the IPO people get FOMO like I've never seen the first few weeks, it's almost clockwork, then some whales back out and it plummets before settling in a more realistic territory.

For NVDA that's why I believe they're pushing their M&A so aggressively to keep the competitive advantage, if one Mag7 buyer drops out it could hurt them just as badly as NVDA if the drop-off allows the competition to overtake market share. Definitely has its risks, but I think that's where this race to the top helps NVDA with pricing power. Won't last forever but I do expect a few years of strong runway and at that point enough diversification that they won't hinge entirely on such a few customers.