Are the Returns on Artificial Intelligence Artificial?

Everyone has been reading about the major indices riding on the back of the Magnificent Seven, with valuations shooting through the roof and to the moon. These days anything with the word “intelligence” attached to it seems to soar, often without any real proof of concept. Investors have been buying on the promise of a more productive future but beneath those numbers do they even make sense? Are the companies making enough money to justify these valuations?

Well, the main guy from The Big Short begs to differ, based on Tuesday’s SEC filings he is not buying the paradise that tech companies are selling. Micheal Burry the legendary investor has taken a sizeable short position of approx. $200 million in Nvidia and $900 million in Palantir by purchasing put options. It is by far one the of boldest contrarian bets that I have seen in recent financial history. True to the investment philosophy and as shown in the movie, Michael burry has invested over 80% of his entire fund’s liquidity into these positions.

The timing of these positions is fascinating. It comes at a time when all AI stocks have performed extraordinarily well and have delivered returns that can make almost any investor feel like an expert in the markets. It also brings into perspective investor psychology and how the herd mentality can come into play. A short position from one prominent institutional investor whose claim to fame was a movie, now has the power to move the markets and give it a reality check. Beyond that, it raises deeper questions about how we value growth across tech and the role of other asset classes like gold in exposing the risks and fragilities in today’s markets.

But why is Burry targeting these two companies specifically? Some of the reasons that I can think of are:

Palantir

Palantir trades at over 700 times its earnings. It is one of the most extreme valuation multiples in today’s markets that reflects peak investor optimism.

• •Revenue concentration: A significant portion of its revenue comes from government and defence contracts, making it heavily reliant on a limited client base.
• •The company faces growing competition from established software players that are rapidly integrating AI-driven analytics into their platforms.
• •As Palantir scales its operations, questions arise about whether it can maintain its margins amid shifting market dynamics and evolving cost structures.

Nvidia

Nvidia on the hand faces similar concerns over its long-term competitive positioning and demand sustainability in the semiconductor industry.

• •Nvidia’s growth is closely tied to CapEx cycles that drive AI infrastructure development, making it vulnerable to shifts in investment sentiment.
• •The company faces growing competition from emerging custom chip manufacturers and in-house solutions developed by major tech firms.
• •Demand duration uncertainty: There are questions about how long the current AI adoption boom can sustain demand for Nvidia’s chips before the market reaches saturation.
• •It is exposed to tremendous geopolitical risks particularly around US – China trade relations and export restrictions on advanced chips.

While both these companies have consistently beaten market expectations, their lofty valuation leaves little room for error. Any deviation from the projected growth trajectory can trigger sharp price volatility, precisely the kind of setup that attracts a contrarian like Burry.

Additional there is a growing concern about a form of circular financing emerging between large tech companies where software revenue and hardware spending hasve become deeply intertwined. This dynamic that can amplify both expansionary phases and market correction.

A simple expansion of this pattern would be

• •Infrastructure Spend: tech company pours billions into AI infrastructure that drives semiconductor demand.
• •Cloud Revenue Growth: those same firms then report higher software revenues fuelled by AI related services.
• •Valuation: this growth is used to justify continued expansion of infrastructure spending and higher valuations.
• •Validation: investor enthusiasm encourages more capital to flow into similar strategies

This loop creates the illusion of sustainable growth, but it has the unintended consequence of introducing systemic risk and if market dynamics change unexpectedly the entire system would collapse.

So, the question arises again - are the returns in artificial intelligence real or simply artificial?