Michael Burry, a well-known American investor and the prototype of the movie "The Big Short," said that Nvidia has put itself in a "dangerous position" in order to meet the expected demand for its microchips. If the artificial intelligence craze subsides, the company may suffer a "catastrophic" financial hit.
In a post on Substack titled "Nvidia ups the stakes" on Thursday, Burry said he found a "worrying" item in the company's annual report: Its procurement obligations ballooned from about $16 billion to $95 billion in 12 months.
Burry said that's because major supplier TSMC insists on longer-term contracts, paid in cash, as a condition of building the capacity needed to produce Nvidia's latest chips.
"To be clear, Nvidia was forced to place non-cancelable purchase orders before demand was clear," Burry wrote, adding that it also took longer for the company to convert inventory into sales.
“This new reality demonstrates a deliberate move to lock in supply chain capacity further than ever before.”
Burry pointed out that Nvidia's total supply obligations of $117 billion were nearly equal to operating cash flow for the year ended Jan. 25.
"This is not an ordinary thing. This is a risk," he wrote.
Burry compared the situation to Cisco during the dot-com bubble. At the time, the internet networking giant extended purchasing commitments with suppliers to ensure it could support expected 50% annual growth.
"When corporate IT spending and data network spending plummeted almost overnight, Cisco wrote down about 40% of its supply chain liabilities and inventory, and its stock price plummeted," he added.
Additionally, Bury said Nvidia's high profit margins stem in part from the pricing power given by strong demand for its products, so margins could decline if demand weakens.
"Unlike companies that are typically able to weather industry swings with ease, Nvidia's heavy supply obligations relative to its earnings and cash flow make market downturns a greater potential risk for Nvidia," he wrote.
"Once a recession hits, the impact on Nvidia's earnings and balance sheet will be more severe and potentially catastrophic."