The artificial intelligence (AI) trade now commands the spotlight and is impossible to ignore. Companies are pouring hundreds of billions into the race for the next technological breakthrough, chipmakers are boasting explosive growth, and investors are eagerly snapping up anything tied to AI. Yet doubts linger. Billionaire Ray Dalio warns of a classic AI bubble taking shape, while Michael Burry is bracing for a dramatic reversal. His bearish stance on giants like Nvidia (NVDA) and Palantir Technologies (PLTR) is fueling an already fiery debate.
The real test is whether the AI revolution can keep churning out profits big enough to match the sky-high hopes riding on it.
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Dalio Sees the AI Boom Approaching a Dangerous Turning Point
Dalio isn't questioning AI's ability to transform the economy. His concern is the financial enthusiasm around it. Speaking at the Forbes Global CEO Conference in Singapore in October, the Bridgewater Associates founder described the AI boom as a classic bubble nearing a dangerous stage. He cautioned that heavy borrowing to build AI infrastructure, especially as interest rates rise, could make these investments hard to sustain. CoreWeave is a prime example.
Dalio also warned that having a lot of paper wealth does not always mean you have cash on hand, especially if most of it is tied up in expensive assets. A shift in sentiment could trigger selling pressure. He believes AI has real business potential, but just because a technology is groundbreaking does not mean every AI stock is worth buying at any price.
There is a reason Dalio's warnings deserve attention. According to Nvidia's CFO Colette M. Kress, the cloud industry backlog is now over $2 trillion. The five biggest hyperscalers are expected to spend nearly $800 billion in 2026 and $1.3 trillion in 2027. The main question is how soon this spending will lead to steady returns.
Michael Burry Is Changing His Big Short Against the AI Trade
On October 11, Michael Burry shared in a Substack update that he had moved most of his bearish options positions into puts on the Nasdaq-100 and the VanEck Semiconductor ETF (SMH). This move means he is now betting against the broader technology and semiconductor markets, instead of focusing mainly on individual stocks.
Nvidia is still a key part of this trade. Burry pointed out that the chipmaker made up 19.6% of SMH, which was the ETF's biggest holding at the time. The fund also included other major semiconductor companies like Taiwan Semiconductor (TSM), AMD (AMD), Broadcom (AVGO), Micron (MU), and Marvell (MRVL). Because of his June 2027 puts, he is exposed to a possible drop in the semiconductor industry, including Nvidia.
Meanwhile, Palantir remains a direct bearish bet. Burry said he still owns individual put options against the software company, as well as positions in Oracle (ORCL), MetLife (MET), and Caterpillar (CAT). He also questioned Palantir's recent rally, noting that trading volume is dropping even though the share price is going up.
Palantir's Latest Earnings Deliver Another Powerful AI Growth Story
Palantir's Nov.2 Q3 earnings report showed revenue surging 96% year over year to $2.3 billion. Surprisingly, the U.S. commercial revenue jumped 148% to $984 million, surpassing U.S. government revenue of $953 million for the first time. The Government segment has long been the company's dominant business. This highlights the growing demand for Palantir's AI software beyond its traditional government customer base.
Customer adoption is fueling remarkable contract growth. For context, an industrial materials company transformed a $3 million pilot into a $29 million annual contract, and a global athletic company turned a $1.6 million pilot into a $21 million annual deal. Net dollar retention soared to 165%, a clear sign that existing customers are investing more than ever. Profitability also stayed strong, with GAAP operating income reaching $1.08 billion on a 47% margin. Adjusted earnings rose 109.5% YOY to $0.44 per share. Management increased its full-year 2026 revenue outlook to between $8.53 billion and $8.534 billion, suggesting about 91% YOY growth. Still, U.S. commercial TCV bookings grew only 11% to $1.46 billion, and total TCV bookings rose 6% to $2.91 billion. Investors will be looking for bookings to match the pace of revenue growth.
Palantir trades at 74 times its projected 2027 earnings. Even though analysts expect earnings to grow by about 40%, this demanding valuation leaves little room for disappointment, reinforcing Dalio's concern that AI enthusiasm may have pushed some stock prices ahead of their fundamentals.
Wall Street has given PLTR stock an overall rating of "Moderate Buy." Of the 31 analysts covering it, 22 rate it a "Strong Buy," one a "Moderate Buy," six a "Hold," one a "Moderate Sell," and one a "Strong Sell." The average price target is $217.97, meaning analysts expect the stock to rise 22.2% from its current price. The highest price estimate is $265, pointing to a possible gain of 48.6%.
Nvidia's Extraordinary Growth Is Testing the AI Bubble Argument
Nvidia's Q2 fiscal 2027 revenue more than doubled from a year ago, reaching $96.2 billion. Data Center revenue rose 117% to $89 billion, up 18% from the previous quarter. Hyperscale customers contributed $49 billion, up 13%, showing strong demand for Blackwell GPUs. This marks the fourth straight quarter of faster growth, with demand coming from hyperscalers, AI startups, enterprises, and government clients.
Profitability is surging alongside the company's rapid revenue growth. GAAP gross margin soared to 75%, a leap from last year's 72.4%, while diluted earnings per share skyrocketed 128% to $2.46. Networking stood out, with revenue climbing 18% sequentially. Spectrum-X Ethernet revenue multiplied 2.6 times year over year, highlighting Nvidia's growing role in the networking infrastructure AI data centers require.
Management expects revenue to jump 70% in fiscal 2028 and says supply will be the main limit on growth. Nvidia has started shipping its new Vera Rubin platform and hopes this will be its fastest product launch yet. Now, the main challenge is delivering smoothly as customers depend more on Nvidia's technology. Still, the big question in the bubble debate is whether these customers will get enough value from their big bets on AI. Nvidia trades at about 21 times its projected 2027 earnings, and with expected earnings growth of 95%, this valuation seems better justified by its growth outlook.
Wall Street widely rates NVDA stock a "Strong Buy." Of the 52 analysts following the stock, 48 recommend a "Strong Buy," three suggest a "Moderate Buy," and one rates it a "Strong Sell." The average target price is $326.35, which points to a possible 61.6% gain from current prices. The highest estimate, $515, points to a potential 155% increase over the next year.
The Key Takeaway
The AI opportunity is indisputable, yet not every AI stock is a good deal right now. Nvidia and Palantir are posting eye-catching growth, proving that their businesses are unlocking real value from this technology. Still, dazzling earnings do not promise the stock will keep climbing, especially when sky-high valuations already bake in lofty expectations. Nvidia has skyrocketed more than 541%, and Palantir has soared an astonishing 748% over the past five years, yet this year their shares have inched up only 7% and 6.2%, respectively.
Dalio's concerns about debt-fuelled AI investment and Burry's bearish bets highlight the risks investors should not overlook. Ultimately, the key is to tell which companies have lasting, AI-driven growth and which stocks have run too far ahead of their fundamentals.
On the date of publication, Sushree Mohanty did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
