NVIDIA = CISCO 2.0

THE RACE FOR VALUATION IN SILICON VALLEY NOW RECALLS TWO DEFINING MOMENTS IN RECENT FINANCIAL HISTORY THE DOT COM BUBBLE IN THE EARLY 2000S AND THE SUBPRIME EXUBERANCE THAT PRECEDED THE 2008 CRISIS. IN BOTH CASES EXCESSIVE EXPECTATIONS AND AN OBSESSION WITH RAPID GROWTH LED TO DISTORTIONS THAT ENDED IN SHARP MARKET CORRECTIONS. TODAY THE TECHNOLOGY SECTOR AGAIN DISPLAYS SIMILAR PATTERNS FUELED BY AGGRESSIVE PROJECTIONS ABOUT ARTIFICIAL INTELLIGENCE DEMAND.

DURING THE DOT COM ERA MANY COMPANIES WERE VALUED BASED ON PROMISES RATHER THAN RESULTS. MOST OF THEM DISAPPEARED AFTER THE CRASH AND THE MAIN WINNER OF THE INTERNET GOOGLE ONLY EMERGED AS A DOMINANT FORCE AFTER THE CORRECTION. THIS HISTORICAL LESSON SERVES AS A WARNING THE MARKET MAY BE POURING CAPITAL INTO PLAYERS WHO MIGHT NOT BE THE WINNERS OF THE NEXT TECHNOLOGICAL CYCLE.

IN THIS CONTEXT MICHAEL BURRY THE INVESTOR WHO PREDICTED THE 2008 CRISIS COMPARES NVIDIA TO CISCO IN THE EARLY 2000S. ACCORDING TO BURRY THE ISSUE IS NOT ACCOUNTING FRAUD AS IN THE CASE OF ENRON BUT A MARKET STRUCTURE IN WHICH MASSIVE INVESTMENTS AND CAPITAL INFLOWS DEPEND ON DEMAND PROJECTIONS THAT MAY NEVER MATERIALIZE. CISCO SOLD REAL EQUIPMENT TO REAL CLIENTS BUT THE INSTALLED CAPACITY FAR EXCEEDED ACTUAL DEMAND LEADING TO A COLLAPSE IN ITS SHARE PRICE.

ON NOVEMBER 23 AND 24 NVIDIA SENT A PRIVATE MEMO TO SELL SIDE ANALYSTS ADDRESSING BOTH BURRY’S WARNINGS AND A FORENSIC ANALYSIS SUGGESTING CIRCULAR FINANCING WITHIN THE AI INFRASTRUCTURE CHAIN. THE COMPANY HIGHLIGHTED SOLID METRICS INCLUDING THE CONVERSION OF 98 PERCENT OF GAAP NET INCOME INTO FREE CASH FLOW SINCE 2018 AN AVERAGE OF 53 DAYS IN ACCOUNTS RECEIVABLE AND STRATEGIC INVESTMENTS TOTALING 4.7 BILLION DOLLARS LESS THAN ONE PERCENT OF ANNUAL REVENUE.

THESE ARGUMENTS ARE RELEVANT BUT THE MEMO ANSWERED THE WRONG QUESTION. THE CORE CONCERN HAS NEVER BEEN ACCOUNTING FRAUD BUT THE DEPENDENCE ON A FINANCIAL STRUCTURE THAT REQUIRES AI DEMAND TO GROW AT EXTREMELY HIGH RATES A PREMISE THAT REMAINS ECONOMICALLY UNPROVEN.

MOREOVER 48 HOURS AFTER THE MEMO REPORTS THAT META WAS NEGOTIATING TO PURCHASE TPUS FROM GOOGLE TRIGGERED A 2.59 PERCENT DROP IN NVIDIA’S SHARE PRICE. THE MARKET WIPED OUT 116 BILLION DOLLARS IN VALUE AT THE CLOSE AND 150 BILLION INTRADAY PROVIDING A CLEAR SIGN THAT INVESTORS ARE SENSITIVE TO ANY INDICATION THAT NVIDIA’S CUDA MOAT CAN BE BREACHED.

BURRY SUMMARIZED HIS VIEW BY STATING THAT NVIDIA IS NOT ENRON BUT RATHER CISCO. HIS DECISION TO LIQUIDATE SCION ASSET MANAGEMENT HAS BEEN INTERPRETED AS A FINAL STATEMENT ON WHAT HE SEES AS A GROWING AI BUBBLE. THE RISK IN HIS VIEW IS NOT GHOST ACCOUNTING BUT EXAGGERATED EXPECTATIONS THAT MAY FAIL TO FIND SUFFICIENT REAL WORLD DEMAND TO JUSTIFY THE MASSIVE CAPITAL ALLOCATION UNDERWAY.

THE META GOOGLE TPU NEGOTIATION REINFORCES THE IDEA THAT NVIDIA’S SUPREMACY IS NOT UNTOUCHABLE. IN AN ENVIRONMENT OF ABUNDANT CAPITAL AND EXTREME VALUATIONS ANY SIGN OF FRAGILITY COULD ACCELERATE A BROAD MARKET REPRICING.

IF HISTORY IS A GUIDE THE BIGGEST WINNER OF THE AI ERA MAY NOT EVEN EXIST YET WHILE TODAY’S GIANTS COULD BE BUILDING INFRASTRUCTURE FAR BEYOND WHAT THE MARKET WILL ACTUALLY REQUIRE. THE SECTOR REMAINS POSITIONED IN A SCENARIO WHERE ABUNDANT CAPITAL HIGH EXPECTATIONS AND SKY HIGH VALUATIONS MAY ONCE AGAIN BE LAYING THE GROUNDWORK FOR A SEVERE CORRECTION.