- Michael Burry of "The Big Short" has warned of a red flag in Nvidia's annual report.
- Burry described a roughly six-fold increase in purchase obligations to $95 billion as "troubling."
- Nvidia's finances could be crushed if demand for its AI chips falters, Burry said.
Nvidia has put itself in a "risky position" to meet expected demand for its microchips, and could suffer a "catastrophic" blow to its finances if the AI boom wanes, Michael Burry says.
The investor of "The Big Short" fame wrote in a Substack post titled "Nvidia Ratchets Up the Risk" on Thursday that he'd spotted a "troubling" item in the company's annual report: a 12-month surge in its purchase obligations from around $16 billion to $95 billion.
Burry said that was driven by key supplier TSMC insisting on lengthier contracts and cash in exchange for building out the capacity needed to build Nvidia's newest chips.
"To be clear, NVDA has been forced to place non-cancellable purchase orders well before demand is known," Burry wrote, adding that the company is taking longer to convert inventory into sales.
"This new reality reflects a deliberate decision to lock up supply chain capacity further than Nvidia has ever done before."
Burry pointed out that Nvidia's $117 billion in total supply obligations nearly matched its operating cash flow for the year ended January 25.
"This is not business as usual," he wrote. "This is risk."
Burry drew a comparison to Cisco during the dot-com bubble, when the internet networking giant extended its purchase commitments with suppliers to ensure it had the capacity to support the 50% yearly growth it expected.
"When enterprises' IT spending and data network spending collapsed almost overnight, Cisco wrote down ~40% of its supply chain obligations and inventory and the stock crashed severely," he added.
Moreover, Burry said that Nvidia's lofty profit margins are partly a product of the pricing power it wields due to excessive demand for its products, so those margins could shrink if demand falters.
"Rather than a business that would normally roll comfortably through the hills and valleys of its industry, the weighty supply obligation relative to earnings and cash flow makes a valley more of a potential entity risk for Nvidia," he wrote.
"Any downturn, when it comes, will be more severe, perhaps even catastrophic, for Nvidia's earnings and balance sheet."
Nvidia did not immediately respond to a request for comment from Business Insider.
Burry vs Nvidia
Burry — one of the few people to predict and profit from the collapse of the mid-2000s US housing bubble — has previously said the AI boom is a bubble, and he's betting against Nvidia because he believes it's particularly vulnerable to it popping.
He wrote in January that Nvidia is "entirely dependent on hyperscaler spending, and I do not see how that math works."
"Nvidia also is the most loved, and least doubted," he added. "So shorting it is cheap."
Nvidia CEO Jensen Huang was directly asked by a reporter in November what he thought of Burry's warning that AI was a bubble about to burst. He replied that "we're a long, long ways from that" and only at the beginning of a multi-year infrastructure buildout.
Nvidia stock was down close to 3% early on Thursday, despite the company growing both its revenue and net income by 65% in 12 months to $216 billion and $120 billion, respectively. Nvidia also projected its year-on-year revenue growth this quarter could be as high as 80%.
Nvidia shares have slid 8% from all-time highs in October. But they're still up more than 13-fold since the start of 2023, making Nvidia the world's most valuable public company with a $4.6 trillion market capitalization.
