The Big Short targets AI

The Big Short targets AI

If you’ve been following our blogs and Montgomery Minutes about noted short seller Michael Burry, you’ll know he’s been making headlines this year for shorting the artificial intelligence (AI) bubble. Late last week, he reported he has again increased those short bets.

If you haven’t been following our posts on the subject, Michael Burry is the former chief of the now-closed hedge fund manager Scion Asset Management and was immortalised by Michael Lewis in his 2010 book The Big Short: Inside the Doomsday Machine, which reported on Burry’s large asymmetric bets against the 2008 U.S. housing bubble.

Burry has spent the first half of 2026 quietly building a massive, interconnected short position against the AI infrastructure boom and reporting his positions through his Substack Cassandra Unchained.

Since launching Cassandra Unchained, Burry has revealed direct equity shorts and put options spanning the entire AI ecosystem. He is betting against the chipmakers, the hardware suppliers, the infrastructure enablers, and even the more speculative upstream and downstream mega-caps riding the narrative’s coattails.

Burry’s track record includes shorting overvalued tech stocks early in his career, such as Amazon at the peak of the 2000 DotCom bubble, before recognising that subprime mortgage bonds were structurally unstable and buying credit default swaps. The latter trade cemented his reputation while netting him US$100 million personally and US$700 million for his investors.

But not every bet has been a winner. Indeed, the flip side to Burry’s high-conviction style is that he’s frequently too early, or occasionally entirely wrong, on the direction of the market. He has, for example, repeatedly predicted market collapses that failed to materialise on his timeline. For example, in early 2021, he warned that Bitcoin and the broader market were in the middle of a bubble that would trigger the “worst crash in history.” It didn’t. 

Burry freely admits in his most recent Substack post that his regular, early warnings have turned him into a bit of an internet meme; “I have become the boy who cried wolf.”

Given the sometimes early and sometimes plainly wrong calls, it behoves investors to refrain from panic-selling their AI portfolio exposures. Nevertheless, it’s worth looking past the headlines and dissecting Burry’s thesis – because he might be right!

Table 1: Disclosed positions

The anatomy of the short book

Burry’s disclosed short positions against the AI supply chain each have their own logic:

1. Micron Technology: Burry shorted Micron directly, reportedly at about US$1,052 per share. His thesis rests on mean reversion. Memory (DRAM and NAND) has historically been a cyclical commodity business. In the 10-15 years to 2025, prices have risen an average of 7.5 per cent per annum. In 2026, prices have risen 100 per cent.
2. Nvidia: Burry has maintained and expanded a months-long short position in Nvidia. He initially cited concerns over dot-com-style ‘circular financing’ deals among Nvidia’s private cloud customers – something we have also written about here. The short is a bet against unsustainable multi-billion-dollar spending run rates.
3. Applied Materials & Caterpillar: To build chip factories, you need equipment from companies like Applied Materials. To build the actual data centres that house these chips, you need power generation systems and industrial machinery from Caterpillar. Their valuations price in unrealistic futures.
4. SOXX & Tesla: Burry holds put options on the iShares Semiconductor ETF (SOXX) expiring in March 2027, expecting the index to drop by a third by then. He has also shorted Tesla with a precise price target of US$416.22, betting its astronomical valuation rests on software and autonomous-driving profits that are years from materialising.

The Catalyst

Short sellers usually require a catalyst – in this case, peak capital expenditure and supply permanently outstripping demand. For Burry, the catalyst was Samsung and SK Hynix announcing a US$500 billion joint investment to build a mega-chip hub in South Korea.

On his Substack, he wrote:

“The proximate cause of today’s rally is big spending announced out of Korea. Well, I see that as the beginning of the end.”

Historically, when every competitor simultaneously announces epochal capital expenditures, it has marked the top of the cycle by creating a supply cliff. By the time these facilities are operational, the market is often flooded, prices collapse, and the hoped-for and priced-in profit margins evaporate.

This time might actually be different

Sure, Burry’s logic makes sense and there are historic precedents, but Burry’s critics argue he is applying an obsolete analogue playbook to a digital paradigm shift. A core counterargument is that AI has fundamentally altered the structural demand curve for semiconductors, moving them from cyclical commodities to permanent utility infrastructure.

The megatrend

Hyperscalers (Microsoft, Alphabet, Meta, and Amazon) are projected to spend over US$700 billion on AI infrastructure this year alone. The question is whether the defensive and offensive arms race is speculative.

And another unanswered question remains whether reasonable rates of return on capital can be generated by the infrastructure builders.

Many observers suggest the memory market of 2026 is structurally different from the fragmented market of the 1990s or 2000s. Today, an oligopoly of just three companies controls roughly 90 per cent of global Dynamic Random-Access Memory (DRAM) and virtually all High-Bandwidth Memory (HBM) production. Perhaps a consolidated supply structure permits some discipline.

The valuation disconnect

On the one hand, unlike the Dot-Com bubble, in which companies with zero revenue traded at infinite multiples, today’s AI leaders are generating massive cash flows.

But on the other hand, those cash flows are declining sharply, from a collective US$250 billion in Q1 2024 to less than US$25 billion forecast for Q1 2027. 

Signs of friction in the AI narrative

Though the bull case also has logic, subtle fractures are beginning to validate some of Burry’s caution. Anecdotal reports indicate that corporate buyers are experiencing sticker shock from AI implementations, prompting hyperscalers like Microsoft to rapidly pivot toward lower-cost small language models (SLMs).

Simultaneously, regulatory friction is escalating. The U.S. government’s recent intervention in the deployment of Anthropic’s advanced Mythos-class model due to national security concerns demonstrates that geopolitics could abruptly throttle industry growth. And elsewhere an environmental backlash is building.

In the hardware layer, rumours that Apple is seeking cheaper memory allocations from Chinese suppliers, alongside reports that Meta is evaluating the sale of its excess cloud capacity, hint that the desperate, supply-starved phase of the AI build-out may be normalising.

Thoughts…

I lean towards the bear thesis, but whether the market corrects from here or from much higher levels is the critical question. And arguably one that’s impossible to answer because it also relies on predicting the shift in sentiment. 

Burry famously shorted the U.S. housing market years before Lehman Brothers collapsed, enduring massive losses and immense pressure from his own investors before he was proven right.

Burry himself acknowledged the high cost of fighting this momentum. He chose a direct equity short on Micron rather than buying put options because the options market had priced in massive implied volatility, making the premiums prohibitively expensive. This is an admission the market’s upward momentum is incredibly strong.

Nobody would suggest liquidating your portfolio simply because a respected hedge fund manager is bearish. There are plenty who are bearish and as many who are bullish. 

Instead, Burry’s increasing bearishness could be used as a trigger to stress-test your portfolio. Are you over-allocated to a single aspect of the AI supply chain? If you own any of the stocks Burry is shorting and they experience a downturn or, like Tesla’s software, their timeline slips, will your net worth take an unacceptable hit?

If not, there’s probably not much to do and you can focus on other things. AI technology is real and it’s transformative, but no industry is immune to gravity. As we’ve been imploring investors for almost a year, diversify, diversify, diversify. Ensure your positions are sized appropriately for your risk tolerance, and if that means reducing exposure to equities and adding some uncorrelated investments to your portfolio, then speak to David Buckland or Rhodri Taylor on 02 8046 5000 or reach out to investor@montinvest.com for more information.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.

Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances. 

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