Famed investor Michael Burry has been bearish on the S&P 500 for ages now. Yet the blue-chip index continues going up, proving him wrong (at least so far).
Despite this, the investor is doubling down on his AI-is-in-a-massive-bubble thesis. And he reckons this hyper-growth stock is vulnerable to a massive share price crash.
Cassandra unchained
As a reminder, Burry was portrayed by British actor Christian Bale in The Big Short film. There are many brilliant scenes in this movie, but my personal favourite is when Steve Carell’s character is told by a dancing stripper that she owns five houses and a condo — all financed with adjustable-rate mortgages.
That’s when the penny drops that there’s a subprime mortgage bubble. Anyway, long story short (no pun intended), Burry and the others were right and made a fortune.
Today, he sees another bubble with AI and has launched a paid Substack called ‘Cassandra Unchained’ to post his research on this subject.
No room for hiccups
This week, Burry shared a chart identifying a particular trading pattern in the share price of Palantir (NASDAQ:PLTR). He believes it has breached a crucial support level and could fall to $80, and then possibly as low as $50.
With the share price currently at $135, this suggests Palantir could crash by 50% or more!
Lending credence to this view is the software stock’s sky-high valuation. Right now, its price-to-sales (P/S) ratio is around 45, while the forward price-to-earnings (P/E) multiple is above 100.
Palantir has been driven to these levels by exceptional company growth, which has fuelled a near-700% share price rally since the start of 2024. However, at its current valuation, there’s absolutely no room for any earnings hiccups (a key risk).
Getting more interested
Now, it should be remembered that Burry is talking about a stock trading pattern. By contrast, The Motley Fool is focused on long-term investing (five years or more). Over this time period, such patterns often amount to nothing more than distant zigs and zags on a chart.
Palantir closed the fourth quarter with $4.26bn of total contract value, a key software bookings metric, which represented year-on-year growth of 138%. And management expects 61% top-line growth in 2026.
Palantir’s ‘Rule of 40’ score – that’s the company’s revenue growth rate plus operating margin – clocked in at an incredible 127%. In software circles, hitting 40 is seen as healthy for a growing business (hence the rule).
Perhaps it should be doubled and renamed the ‘Rule of 80’ now Palantir has made a mockery of it!
If the stock were to crash anywhere near $70, I will add it to my Stocks and Shares ISA. At this level, the forward-looking P/E multiple would be around 40, based on forecasts for 2027.
For a company as profitable as this, I think that would prove good value. Because even if Burry is right and an AI bubble pops, it’s unlikely that companies and organisations will suddenly stop using Palantir’s Foundry and AIP (Artificial Intelligence Platform). These are helping customers make better decisions and become more efficient and profitable.
With the stock down 35% since November, I’m definitely getting more interested. But I’m not ready to buy it just yet.
