The AI Trend Isn't Out of Steam Yet

Editor's note: Earlier this month, one of America's most famous investors spooked the market. According to Pete Carmasino of our corporate affiliate Chaikin Analytics, this investor's billion-dollar bet has created a lot of "noise" in the AI space. But one critical investing tool shows this boom isn't running out of steam...

Also, our offices will be closed tomorrow and Friday in observance of Thanksgiving. That means our next issue of DailyWealth will publish on Saturday, November 29. Enjoy the holiday!

By now, you've probably heard about Michael Burry's recent billion-dollar bet against artificial intelligence ("AI")...

Burry is a hedge-fund legend. He's most famous in the investing world as "the man who called the 2008 housing crash."

Before the bubble burst, Burry foresaw the collapse of the U.S. subprime lending market. And he positioned himself to capitalize on the crash through credit default swaps.

In the end, Burry made $100 million for himself and $725 million for his investors.

Author Michael Lewis popularized Burry's story in his 2010 book, The Big Short. Then, five years later, actor Christian Bale played Burry in the movie adaptation.

Now, Burry is back at it. But he may be giving up on one of the market's biggest trends too early...

Earlier this month, Burry's hedge fund revealed "short" positions against AI leaders Nvidia (NVDA) and Palantir Technologies (PLTR). It looked like an enormous bet at first glance... but Burry didn't actually spend $1 billion.

In reality, it was a leveraged bet using "options" – which is dangerous in its own way...

If you're not familiar with options, one contract controls 100 shares of the underlying stock.

So if you bought one put-option contract for $1.84 on a $190 stock, you'd only need to use $184 of your own money. That's the $1.84 cost times 100 shares.

In other words, for just $184, you'd get the exposure or return of a $19,000 investment.

The catch is that you can lose all the money you put into the options...

Options are only good until a predetermined date. They continue to lose "time value" as they get closer to that date. And eventually, they can expire worthless.

During the third quarter, Burry bought 50,000 put options on Palantir at $1.84.

Knowing what you now do about options, you see that he spent roughly $9.2 million on his bet. That's 50,000 contracts times 100 shares for each contract times $1.84.

This bet amounts to 5 million shares of Palantir's stock. At roughly $184 per share, the "notional value" of Burry's position is about $920 million.

Burry did the same thing with Nvidia for another $187 million in notional value.

That's more than $1 billion in notional value overall.

To be clear, I need to give Burry credit. He put his money where his mouth is – at least some of it. And as you know, tech stocks recently endured a terrible stretch. So Burry could've made a short-term profit.

But folks, let's be realistic...

Calling tops in bull markets is a brutal game. That's true even for guys like Burry, who got famous doing it once, almost two decades ago.

And despite a recent tough patch for stocks, the bull market hasn't ended yet. Just consider the big news from Nvidia last week...

Nvidia's CEO Says Sales Are 'Off the Charts'

Last Wednesday, Nvidia reported third-quarter earnings. Leading up to the earnings release, investors were uncertain how the results would come in – and about the AI narrative in general.

Burry's big move certainly played a role in all that anxiety.

Put simply, investors have been on edge. Just take a look at Nvidia's stock using the Power Gauge...

As you can see, the Power Gauge rated Nvidia as "bullish" or better for almost the entire past six months. And the stock has mostly enjoyed sustained positive activity from the "smart money" on Wall Street, which you can see through the Chaikin Money Flow panel.

But the stock has recently pulled back from its October highs. And the Chaikin Money Flow dipped into the red. Plus, Nvidia's Power Gauge rating dropped into "neutral" territory leading up to the earnings announcement.

However, you'll notice the big recovery in the stock's Chaikin Money Flow from the low point. Meanwhile, Nvidia's relative strength versus the S&P 500 Index has also been strong for the past six months.

Then last week, as Nvidia CEO Jensen Huang noted in the earnings release regarding the company's chips, "Blackwell sales are off the charts, and cloud [graphics processing units] are sold out."

Those aren't empty words, folks...

During the quarter, Nvidia brought in record revenue of $57 billion. That's a jump of 62% year over year. And looking ahead to the fourth quarter, the company expects revenue to increase to $65 billion, give or take 2%.

Put simply, Nvidia is still printing money.

Plus, keep in mind that Palantir beat earnings and raised guidance earlier this month.

This should help calm some investors' nerves about the AI boom running out of steam.

And coming back to Burry, only time will tell if he's right over the longer term...

The news of his billion-dollar bet has created a bunch of "noise" in the market. But I doubt he'll make anything close to what he did with his bet against the housing industry in 2008.

Folks, my point is simple...

I think Burry is way too early in the cycle.

To be clear, don't be surprised to see volatility along the way. But I'm not backing away from the AI megatrend just yet.

Good investing,

Pete Carmasino

Editor's note: Marc Chaikin, founder of Chaikin Analytics, has developed a way to spot potential Wall Street buying sprees – across 5,000 stocks – before they occur. Now, he says the market's biggest move of the year could begin on December 3... And if you know what's coming, you could use his new "rapid fire" form of investing to potentially double your portfolio.