Michael Burry drops shocking verdict on software stocks

Michael Burry is making an uncomfortable call, and he is no stranger to such calls. He is making his opinion known while people are steering clear of software stocks.The investor who is most famous for "The Big Short" is getting into a part of the market that is under a lot of pressure. He says that the recent problems may have less to do with businesses going bankrupt and more to do with technical stress spreading through the system.That is a sharp break from what is going on in Wall Street right now.Right now, the market is obsessed with artificial intelligence winners, mega-cap momentum, and anything connected to the prospect of increasing computing power. Meanwhile, older software and payments names are struggling to make an impression. These legacy names struggle to hold attention, let alone investor confidence in today's market.Burry thinks that disconnect will help make money.He opened a roughly 3.5% position in PayPal (PYPL), kept holdings in Fiserv (FI), Adobe (ADBE), Autodesk (ADSK) and Veeva Systems (VEEV), and said he planned to add Salesforce (CRM) and MSCI (MSCI).That shopping list is not random.It is a targeted bet that select companies have been hit by fear, forced selling and broad skepticism rather than any issue with the actual fundamentals. If Burry is right, this is not your regular dip-buying movement. It is a warning that Wall Street is misreading an entire segment of the stock market. “I do not believe the technical pressures brought on by the private credit/software debt issues are big enough to affect these stocks for much longer,” Burry wrote.Michael Burry says the software selloff has gone too farBurry’s core argument is simple. He believes a “reflexive positive feedback loop” is the principal reason why software stocks are trending lower. The drop in share prices, the stress from debt connected to software companies, and the nervous positioning all seem to have fed into each other, making the selloff worse.That matters because it changes the entire read when it comes to these stocks.If software stocks are going down because sales are going down, customers are leaving, and competition is cutting into profits, then investors should stay away. But if prices are going down because of technical pressure and fear-based selling, that's a whole different story. In that case, investors who are willing to get in early may be buying strong companies at prices that are more affected by fear than by the company's fundamentals.That seems to be exactly where Burry sees value.His list includes companies that still occupy important positions in payments, design software, enterprise workflows and data analytics. These are not speculative investments. These are well-known companies that have fallen out of favor as investors have moved away from businesses that are seen as mature, slow-growing, or vulnerable to disruption and toward the most exciting artificial intelligence trades.Related: Legendary skeptic delivers 6-word verdict on Palantir’s hot streakPayPal is perhaps the biggest and most striking name on this list. The company has spent years trying to regain its footing with investors after there was universal acclaim as one of fintech’s clearest long-term winners. Growth cooled. Competition intensified. The market began to question whether PayPal still had the same sting it was once famous for. Burry’s move suggests the momentum might have swung one way too much. Michael Burry makes huge claim about battered software stocksPhoto by Astrid Stawiarz on Getty Images PayPal could become the clearest test of Burry’s contrarian betIf Burry’s thesis is correct, PayPal is more than just undervalued.It is a test case for whether Wall Street is too quick when it comes to discarding quality software stocks when they are no longer attracting the attention they were once getting. However, the key issue here is that PayPalcontinues to generate meaningfulcash flow, retain major customer reach, and operate in categories that remain essential.That does not mean Burry is bullish on software across the board.He makes a clear distinction between companies he thinks can handle the shift to artificial intelligence and those he believes might be hurt badly by advanced large language models. He said that some companies are really feeling the heat from these technologies, but not the ones he has chosen.That makes the investment a much more disciplined bet than a simple “buy the dip” trade.Burry doesn't claim that all software stocks face unfair punishment. He claims that certain businesses have experienced a larger washout, despite their fundamentals not justifying the same level of damage. That difference is crucial, especially in a market where investors are eager to group old software names together and move on.More Tech Stocks:Morgan Stanley sets jaw-dropping Micron price target after eventNvidia’s China chip problem isn’t what most investors thinkQuantum Computing makes $110 million move nobody saw comingThat is what makes PayPal so fascinating here.Burry is going in the opposite direction of the market, which is looking for the next big thing in artificial intelligence. He is buying a stock that a lot of investors have given up on, which means that the market may be confusing temporary damage with a permanent drop.If that view starts to catch on, PayPal and the other names on Burry’s list may not stay beaten down for long.Why Burry’s software bet carries a bigger message for investorsBurry’s latest move is not solely about PayPal.It also provides a more general perspective on how investors should approach software equities in a market transformed by AI euphoria, economic stress, and aggressive repositioning. Some names will definitely stop being important. Some business concepts will have to deal with a lot of stress. Some stocks will fall in value.But Burry seems to be stating that investors are making a different kind of mistake when they think that every software firm that isn't doing well is flawed.That's when contrarian investing really works.The best contrarian calls are unpopular. They are based on the idea that the audience is paying attention to the wrong signal. Burry seems to think that the market is too focused on technological harm and too quick to forget that some of these companies may still have strong businesses and room to grow.That might be a big change for PayPal.The stock has been struggling for a long time to show that it still belongs in debates about meaningful growth and value. Burry's move alone won't fix it. But it does show that one of Wall Street's most watched contrarians sees something the rest of the market might not.That alone is enough to make you look again.In this industry, a second glance can reveal the true story, especially since fear and fashion often move quicker than the facts.Key takeawaysMichael Burrydisclosed a roughly3.5% position in PayPal.He said he maintains holdings at Fiserv, Adobe, Autodesk and Veeva.He also plans to add Salesforce and MSCI.Burry argued that technical pressures tied to private credit and software debt helped drive the selloff.He said some software companies face real artificial intelligence risk, but not the ones he selected.PayPal is now the clearest test of Burry’s contrarian software thesis.Related: Palantir stock caught in a battle over pension billions