Michael Burry’s Battle Against Nvidia: A Deep Dive

As the Thanksgiving holiday approaches, the financial community is buzzing about Michael Burry, the notable investor famously portrayed by Christian Bale in “The Big Short.” Burry is currently escalating his criticism of Nvidia, and this conflict has significant implications for the tech industry, especially amidst rising concerns about an AI bubble.

Burry’s AI Skepticism

What sets Burry’s warnings apart from previous cautionary tales about an AI bubble is his growing influence and the newfound freedom he has to communicate openly. He is not merely betting against Nvidia; he is actively trying to sway his expanding audience into believing that Nvidia, often hailed as the king of the AI era, is overvalued. This has led to questions about whether Burry can instigate enough doubt to undermine Nvidia, which, in turn, could impact other players in the AI space, including OpenAI.

In recent weeks, Burry has intensified his campaign against Nvidia. His criticisms came to a head when regulatory filings revealed he was holding over $1 billion in bearish options on both Nvidia and Palantir. This prompted an exchange of barbs between Burry and Palantir CEO Alex Karp, who deemed Burry’s strategy “batshit crazy.” Burry countered by jokingly pointing out Karp’s apparent misunderstanding of SEC filings.

The Crucial Debate: AI’s Future

This public spat encapsulates a critical division within the market: Will AI revolutionize various industries, justifying the massive investments being funneled into it? Or are we witnessing the early stages of a catastrophic overvaluation? Burry’s allegations against Nvidia are specific and alarming. He argues that Nvidia’s stock-based compensation has cost shareholders a staggering $112.5 billion, effectively halving owner’s earnings. He also posits that AI companies are creatively manipulating their depreciation tactics to misrepresent the real value of their equipment. In Burry’s view, the customer demand Nvidia touts is largely deceptive, suggesting that AI clients are financially supported in a circular financing model.

Nvidia’s Pushback

Faced with Burry’s escalating criticism, Nvidia felt compelled to respond. In a recently distributed seven-page memo to Wall Street analysts, reported by Barron’s, Nvidia refuted Burry’s claims, arguing that his calculations were incorrect, particularly regarding stock buybacks. Nvidia stated that the real figure is $91 billion, contradicting Burry’s numbers. They also emphasized that their employee compensation practices align with industry standards and outright rejected any comparison to the notorious Enron scandal.

In response, Burry clarified that his comparison was not with Enron but rather with Cisco during the late 1990s. According to Burry, Cisco overinvested in infrastructure that wasn’t necessary at the time, leading to a 75% plunge in its stock when the market corrected itself.

The Ongoing Speculation

Looking ahead, the situation could dramatically evolve by the Thanksgiving of next year. Nvidia’s stock has soared twelvefold since early 2023, positioning the company with a market capitalization of around $4.5 trillion and making it the most valuable firm globally at an unprecedented pace.

However, Burry’s history is multifaceted. He is celebrated for his accurate predictions of the housing crisis, which garnered him considerable accolades. Nevertheless, since then, his ongoing forecasts of various crises have earned him the “permabear” label. Some investors who have closely followed his insights have missed significant bull runs, including the GameStop surge, from which Burry sold his shares prematurely, and a costly short position in Tesla.

Earlier this month, Burry took a significant step by deregistering his investment firm, Scion Asset Management, with the SEC. He cited “regulatory and compliance restrictions” that hampered his ability to communicate effectively as the reason for this move. This decision reflects his ongoing frustration with how his views have been misunderstood on social media platforms.

Launch of “Cassandra Unchained”

As a new outlet for his thoughts, Burry has launched a Substack newsletter titled “Cassandra Unchained,” which he describes as his primary focus. For a yearly subscription fee of $400, subscribers can gain insights into his analyses and projections for various stocks and market trends, framed within historical contexts.

Interest in Burry’s new platform is palpable; the newsletter gathered 90,000 subscribers within its first week. This surge in following raises questions about whether Burry could indeed be the “canary in the coal mine,” signaling an impending crisis, or if his newfound audience could inadvertently trigger the collapse he foresees.

Lessons from Financial History

Historically, notable critics have played pivotal roles in undermining companies facing real systemic issues. For instance, Jim Chanos’s critiques of Enron didn’t create the company’s fraud but allowed other investors to voice skepticism, hastening its downfall. Similarly, David Einhorn’s examination of Lehman Brothers before 2008 sparked doubts that contributed to a larger sell-off.

If enough investors resonate with Burry’s warnings regarding potential AI over-expansion, we may witness a validating sell-off, creating a self-fulfilling prophecy that further supports his negative outlook. While Nvidia’s recent performance may suggest that Burry’s claims are gaining traction, a broader look at its annual performance paints a more complex picture.

The Stakes for Nvidia and Burry

What is unmistakably clear is the level of risk faced by Nvidia, which has staked its future on a massive valuation and its role as a cornerstone of the AI landscape. In contrast, Burry has relatively little to lose besides his reputation, and he’s armed with an expanding platform to air his views.

As we watch the unfolding drama play out, the financial world is left with a critical question: Will Burry’s campaign culminate in the market correction he anticipates, or will Nvidia continue its ascent, defying the bearish predictions? As the year progresses, this saga will be one to keep an eye on, with implications that could resonate well beyond the realms of finance and technology.

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Emmanuel Kesse

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