Is the 'AI Bubble' the Next 'Big Short'?

Michael Burry nailed "the big short" before anybody else.

The big short – later the title of a popular film – was a trade in which Burry and others bet against the subprime mortgages that fueled the housing boom leading up to the financial crisis of 2008.

Burry studied subprime mortgages with low initial interest rates that were meant to attract lower-income buyers and folks with poor credit. He realized that many of those borrowers would have a lot of trouble paying their mortgages after the low introductory rates were replaced by high interest rates. He also realized that large numbers of those mortgages' interest rates would ratchet up starting around 2007.

To bet against the coming debacle, Burry went to Goldman Sachs and convinced the firm to sell him credit default swaps ("CDSs") on subprime mortgage bonds. CDS contracts are like put options on bonds. If the bonds fall in value, the CDS goes up in value. Goldman sold them relatively cheaply while the housing boom raged, because nobody but Burry and a small handful of skeptics believed it would end as badly as it did.

Some of Burry's investors didn't like him betting against such a powerful trend, and they pulled their money out of his fund. But Burry had been right all along and eventually made $100 million for himself and $725 million for his investors.

He'll be forever associated with "the big short," and he seems fine with that, calling himself "Cassandra Unchained" on X.com.

Now, Burry seems to think he's found a new big short.

This time, he's got everybody's two favorite AI stocks in his crosshairs.

Michael Burry Targets Two AI Darlings

In a Securities and Exchange Commission filing last week, Burry disclosed a $1.1 billion bet against Palantir Technologies (PLTR) and Nvidia (NVDA).

Burry says the companies are overstating their revenues through accounting legerdemain. Put simply, Burry believes the companies are using clever – perhaps even deceptive – accounting gimmicks to exaggerate their financials.

Whether he's right or not, one thing is certain, the hype around the AI stalwarts is huge and they're both trading at high valuations. That makes NVDA and PLTR potentially attractive short sales...

Nvidia is the most valuable company in the world and in stock market history, with a market cap of $4.5 trillion. CEO Jensen Huang has said its products provide "time travel" by facilitating simulations and modeling data in ways that were previously impossible... providing us with a more accurate glimpse of the future. He's also somewhat of a "cult of personality" figure, who once autographed a woman's chest.

Palantir CEO Alex Karp says he's running "the most important software company in the world." He recently said the company reported "arguably the best results that any software company has ever delivered." Barron's immediately wrote an article debunking the claim, noting AppLovins' (APP) recent blowout report, plus historical examples including Zoom Communications (ZM) (and other pandemic outliers) and Microsoft (MSFT) in January 1996. And one Wall Street analyst calls Palantir the "Messi of AI," a reference to Argentine soccer star Lionel Messi, widely viewed as one of the sport's all-time greats, perhaps even the greatest.

Karp had better be right. Palantir sells for 111 times sales and 217 times forward earnings estimates. That's an insanely high valuation which nobody in their right mind would ever tell you is justifiable.

But Nvidia's track record suggests that if a company continues to grow at a breakneck pace, it can grow into an insanely high valuation...

A Deeper Dive Into Burry's Two Short Targets

On July 19, 2023, Nvidia's market valuation peaked at around 45 times sales and 218 times earnings. There's no way any business such a valuation. Anybody who expressed skepticism would have been entirely justified...

And entirely wrong.

Since that moment, the stock has risen more than 300%. Today it trades at around 28 times sales, 57 times earnings... and just 30 times forward earnings. The entire S&P 500 Index trades at 30 times current earnings and 23 times forward earnings. Nvidia is not insanely expensive relative to the overall index. And the forward earnings multiples suggest the valuation is about to become even more reasonable relative to the rest of the index.

Yes, it's still richly valued. But it's not nearly as insanely valued as it was a little more than two years ago. The earnings growth has – so far – lived up to the hype. Selling graphics processing units ("GPUs") for AI grew the business into its insane, "unjustifiable" valuation.

Now look at Palantir...

Its revenue growth rate was shrinking until it introduced its Artificial Intelligence Platform ("AIP") product in 2023. Since then, its year-over-year sales growth rate has increased every quarter since the third quarter of 2023, recently hitting 63%.

The company's U.S. government contracts get a lot of press, but the widespread adoption of AIP among the global private sector is driving its success. U.S. commercial revenues alone increased 121% last quarter.

Palantir reported $476 million of net income in the third quarter of 2025, roughly equal to the company's net income for all of 2024. That is astronomical growth... which might one day justify the company's astronomical stock price.

Still, you have to ask... How could a company that generated less than $4 billion in revenues over the last four quarters really be worth nearly $400 billion in market cap? There's no way it can sustain this kind of growth... right?

The example of Nvidia growing into a far less insane valuation says otherwise.

I've been using a bottom-up, fundamentals-based value investing strategy for the past three decades. I know what an overvalued stock looks like. And Palantir is insanely overvalued.

AI Will Change Your Life – Whether You Want It to or Not

AI is very likely at least as transformative a technology as the Internet. It really will change every aspect of your life, whether you want it to or not – just like the Internet did. It really will affect every business and every person on the planet – just like the Internet. And Nvidia and Palantir are currently running smoking-hot businesses that are growing like weeds on steroids and filling a growing need to build AI infrastructure and use it to make businesses more efficient.

I'm not saying there's no downside in these stocks. Their nosebleed valuations alone are a bigger source of risk than most bulls will acknowledge (even as they're less a source of risk than value-oriented bears tend to understand). But valuation alone is not a timing mechanism, nor is it a reason to refrain from buying or selling. Investing is more complicated than that.

Nvidia is the most valuable company in the world for a good reason. It's by far the No. 1 provider of the GPUs without which AI data centers simply could not function. Someday, new competition will come along and eat its lunch. But its GPUs are in high demand, semiconductor plants don't go up overnight, and it's insanely profitable and still growing.

Likewise, Palantir's AIP has lit the fuse on a growth rocket, with already high revenue growth accelerating to incredible levels last quarter. It's expecting more than 100% revenue growth in its U.S. commercial division – where AIP has really caught fire.

Sooner or later, all booms end, and the bigger they are, the more likely it is they'll become epic busts, just like the dot-com boom and bust.

But let's never forget that the dot-com episode showed us that the ensuing bust was a small price to pay for the massive new wealth that was created over the next couple decades. Few people understood that in real time. But we all get it now.

Likewise, few people understand how AI will permeate our lives in the coming years. Right now, it's just FOMO everywhere you look...

Hyperscalers fear not building enough data-center capacity. Mark Zuckerberg has famously said the real risk is not spending enough. Software companies fear not building the best model and training it quickly enough. And of course, investors fear not getting on board in time to make enormous profits in AI-related stocks.

Nobody sees how they'll be doing things differently in a few years... even though many of us are already doing things differently now. I peppered Google's AI-enabled search and Perplexity.ai with at least a dozen questions to write this essay. I already don't do any part of my job without AI's help. And I use it as an educational tool to help me learn about everything from guitar gear to nuclear physics and just about anything else.

In the past, this is the part where I'd have told you that it's an insane speculative frenzy that's bound to end in tears for the overwhelming majority of investors. In fact, that is still true...

But now I feel it's much more important to point out two other things about big technology boom/bust cycles.

Two Lessons to Take Away From the AI Boom

First, they happen because the technology really is massively important and transformative. I trust I don't need to reiterate how important the Internet turned out to be.

Second, booms can and frequently do go on longer than even some optimists might guess. Calling market tops is an exercise in futility.

Finally, I envy you if you're under the age of about 40. You see, most of us older folks are a little too cautious about taking risks with our money. It's the right thing to do. Many of us are already retired, and the rest of us are thinking about the day when our careers will be over and we'll still need an income to live.

But if you're younger, you can afford to take bigger risks and participate more aggressively in what's happening right now. You can dig in and understand the trends and where wealth is being created and where it isn't.

If I were a younger man right now, I'd want to make a fortune from AI. And to do that, I'd read every word of our newest publication, Market Maven.

It's researched and written by Gabe Marshank, who has worked for Wall Street greats Leon Cooperman, Art Samberg, and Steve Cohen. He's made investors billions of dollars. I spoke with him recently at a reception in Las Vegas and he told me how excited he was to help our subscribers become much better investors.

AI might become a bubble. Heck it could even be one right now. But don't worry about the end of the bubble. Focus on the epic wealth creation now underway.

Calling tops is a risky game, and folks like Michael Burry will be calling the top of the AI bubble long before it arrives.

Seize the day. Learn all you can about AI. Do all you can to exploit the opportunity while it's here.

Good Investing,

Dan Ferris

Editor's Note: A former hedge fund manager known for spotting early winners is sounding the alarm once again.

He called Netflix at $7.78 (up 4,200% since), Apple at $0.35 (up 20,000%), and Amazon at a split-adjust $2.41 (up 3,200%).

Now, this renowned investor just released a new list of his favorite AI stocks... and not a single Magnificent 7 name made the cut.

Instead, an AI stock you've likely never heard of just flagged as "near-perfect" in his new investing scoring system.

Click here to watch his brand-new presentation, where he reveals the name, ticker symbol, and why this could be the smartest AI move of the year... especially if you're over 50.