'Big Short' Michael Burry warns Nvidia is taking on risk that could be 'catastrophic'

"To be clear, NVDA has been forced to place non-cancellable purchase orders well before demand is known. This new reality reflects a deliberate decision to lock up supply chain capacity further than Nvidia has ever done before. 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. This is risk."

"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. 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."

Nvidia has increased its purchase obligations from $16 billion to $95 billion over 12 months, driven by supplier TSMC requiring longer contracts and upfront cash for capacity expansion. The company has placed non-cancellable purchase orders before demand is confirmed, locking up supply chain capacity at unprecedented levels. Nvidia's total supply obligations of $117 billion nearly equal its annual operating cash flow, representing a significant departure from normal business practices. This strategy mirrors Cisco's approach during the dot-com bubble, when the company extended supplier commitments to support expected 50% yearly growth. When demand collapsed, Cisco wrote down 40% of supply chain obligations and inventory, causing severe stock decline. Nvidia faces similar catastrophic financial consequences if the AI boom falters.

Read at Business Insider