Is the AI Stock Bubble Ripe for a Pop?

The market's current obsession with artificial intelligence (AI) has created a frenzy reminiscent of the dot-com era, with investors scrambling to bet on the next big thing. Yet, amid the euphoria, one contrarian voice stands out: Michael Burry, the hedge fund manager who famously predicted the 2008 housing crisis. In Q3 2025, Burry's Scion Asset Management placed a $1.1 billion bearish bet against two AI darlings-Nvidia and Palantir-raising urgent questions about valuation sustainability and market psychology, according to a Blockonomi report. This analysis examines whether the AI stock bubble is nearing a critical inflection point.

The Burry Bet: A Contrarian Signal

Burry's short positions on Nvidia and Palantir are not mere speculation. The $187 million notional value on Nvidia and $912 million on Palantir represent 80% of Scion's portfolio, signaling a concentrated, high-conviction trade, according to the Blockonomi report. Notably, these positions lack hedging language, suggesting outright bearishness rather than risk mitigation, according to a Parameter report. Burry's rationale? A warning about a potential AI bubble, underscored by cryptic social media posts referencing "circular financing" concerns tied to Nvidia, as noted in the Blockonomi report.

This move aligns with Burry's history of targeting overvalued tech stocks, such as the iShares Semiconductor ETF in 2023, as noted in the Parameter report. His actions highlight a growing unease among institutional investors: while AI's transformative potential is undeniable, the current valuation multiples may not reflect reality.

Historical Parallels: Dot-Com Redux?

The parallels between today's AI euphoria and the 1990s dot-com bubble are striking. In both cases, speculative fervor drives valuations far beyond traditional financial metrics. For instance, Palantir trades at a forward P/E ratio of 217, while Nvidia's P/E stands at 50, according to a Chronicle report. These figures pale in comparison to the dot-com era's peak valuations but still signal speculative excess, according to a IE Insights article.

Robert Shiller's concept of "irrational exuberance" is alive and well. Investors are prioritizing AI-specific metrics-such as model parameters and benchmark performance-over conventional indicators like earnings or revenue growth, according to the IE Insights article. This shift mirrors the dot-com era, where companies with no profits were valued based on user counts or website traffic.

Institutional analysts have drawn direct comparisons. Torsten Sløk of Apollo Global Management warns that the top 10 S&P 500 companies are more overvalued than in the late 1990s, according to the Chronicle report. Deutsche Bank has even labeled current AI investment levels "unsustainable," noting the industry would need to generate $2 trillion in annual revenue by 2030 to justify today's spending, according to the Chronicle report.

Fundamentals vs. Valuation: Can Growth Justify the Hype?

Nvidia and Palantir's Q3 2025 results underscore their dominance in the AI space. Nvidia reported record revenue of $35.1 billion, with its Data Center segment contributing $30.8 billion-up 112% year-over-year, according to Nvidia's Q3 earnings. Palantir's revenue surged 63% to $1.18 billion, driven by its AI Platform (AIP) and defense contracts, according to a Yahoo Finance report. Both companies boast robust profit margins: Nvidia's gross margin hit 72%, while Palantir's adjusted operating margin reached 51%, according to the Chronicle report.

However, these fundamentals clash with their valuations. Palantir's price-to-sales ratio of 137 and Nvidia's 28 are multiples of industry averages, according to the Blockonomi report. Even by tech standards, these metrics suggest investors are paying for future potential rather than current performance. As one analyst noted, "The market is pricing in a future where AI dominates every industry, but the reality is still years away."

Market Psychology: FOMO and the "Magnificent Seven"

The psychology fueling the AI bubble is as critical as the numbers. Fear of missing out (FOMO) has driven retail and institutional investors alike to pile into AI stocks, creating a self-reinforcing cycle, according to the IE Insights article.

Yet, this psychology carries risks. The concentration of investment in a handful of "Magnificent Seven" stocks-Nvidia, Palantir, and others-creates systemic vulnerabilities. A correction in one could trigger a cascade across the sector, according to the Chronicle report. Burry's short positions may reflect this concern, as his portfolio also includes bullish bets on Halliburton and Pfizer, hedging against a broader market downturn, according to the Blockonomi report.

The Verdict: Pop or Persevere?

The AI stock bubble is not a monolith. While speculative startups and overhyped companies face significant risks, established players like Nvidia and Palantir may weather a correction due to their strong fundamentals and diversified revenue streams, according to the IE Insights article. However, the current valuation multiples leave little room for error.

Burry's $1.1 billion bet is a cautionary signal. It suggests that even as AI reshapes industries, investors must distinguish between sustainable innovation and speculative froth. For now, the market remains in a delicate balancing act-between optimism and overreach, growth and gravity.