Nvidia vs. Burry: How the chipmaker fends off attacks from 'Downgrade Game' investor

The world's largest maker of processors for artificial Nvidia sent a note to Wall Street analysts responding to criticism from investor Michael Burry, known for predicting the 2008 crisis as well as accusations of misreporting. The dispute over the economics of infrastructure for artificial intelligence erupted after the financier's fund bet on a drop in Nvidia's stock.

Nvidia's investor relations team prepared a seven-page memo responding to criticism from skeptical investors and sent it to Wall Street analysts over the weekend, Barron's reported. He reviewed the document and confirmed its authenticity with several sources.

The company started the note with a reaction to a recent post by prominent investor and financier Michael Burry. The prototypical character from the movie "The Downgrade Game" accused Nvidia of excessive stock dilution due to employee compensation and large buyback programs. Specifically, he wrote that the company has repurchased $112.5 billion worth of its stock over the past seven years, while increasing the number of securities outstanding by 47 million.

"Nvidia has bought back $91 billion worth of its own stock since 2018, not $112.5 billion. Burry probably mistakenly included taxes on RSUs(Restricted Stock Units - a form of compensation where shares vest in the recipient after conditions are met - Oninvest) in there. Employee compensation should not be confused with evaluating the effectiveness of a buyback program. And the fact that employees benefit from share growth does not mean that the grants were excessive to begin with," the document says.

Burry emphasized in his comment to Barron's that he disagreed with Nvidia's position and still believes his analysis is correct. He said he plans to elaborate on the topic of equity compensation in a separate post. Burry plans to publish it on his new paid blog.

Another point of criticism, including from Burry, is that Nvidia's largest customers - technology corporations - allegedly miscalculate the cost of the company's equipment.

Some customers do use a six-year amortization period for graphics processing units (GPUs), Nvidia said in a memo. Burry believes the real life is shorter, which means companies are artificially boosting profits by spreading depreciation over too long a period.

"Nvidia customers write off the value of GPUs over 4-6 years based on actual lifetimes and actual utilization," Nvidia said in the memo. - Older models, such as the A100 (released in 2020), are still running at high utilization and generating meaningful revenue, retaining economic value well beyond the 2-3 years some critics claim."

Nvidia CFO Colette Kress, in a conference call following the release of its quarterly report, said the chipmaker's hardware is staying productive longer than Burry had anticipated. She said the AI chip's lifespan is extended by a software system called CUDA-GPU, which gives the company a significant advantage in the total cost of ownership of its processors over its competitors. "Thanks to CUDA, the A100 GPUs we shipped six years ago are still running at full utilization," Kress said.

Earlier this month, Michael Burry posted a warning on social network X that tech giants that buy Nvidia hardware may be artificially inflating their financials. In his opinion, companies underestimate the amortization of AI chips in reporting: the real life of such GPUs hardly exceeds five years, while they are written off according to six-year schedules. The longer the amortization period, the lower the annual expenses and the higher the profit, which, according to the financier, is what leads to distorted results.

After Nvidia's quarterly earnings release, Burry wrote that customers' use of older chips does not mean that their "useful life" is getting longer in an accounting sense. He believes such logic confuses the physical use of the hardware with its actual economic value. "Just because something continues to work does not mean that it generates profit," the investor noted.

In addition, Burry criticized Nvidia for so-called round-robin deals, where the company actually finances technology customers who buy hardware from it, or leases computing power from companies that purchase its chips themselves. "In the future, this will be looked at as a fraud rather than a working flywheel. The real end demand is negligible. Almost all customers are funded by their own suppliers," he said on Nov. 20.

Burry's fund Scion Asset Management bought put options, which rise in value when stocks fall, on securities of Nvidia and military artificial intelligence developer Palantir in the third quarter.

This article was AI-translated and verified by a human editor