Nvidia‘s (NASDAQ:NVDA) evolution from a gaming chips maker to the premier supplier for AI systems has been nothing short of astounding. The market has responded in kind, sending its stock soaring 1,000% over the past three years and elevating the company to the most-valuable in the world with a $4.3 trillion capitalization.
Yet as demand has grown, accelerating Nvidia’s revenue expansion to $57 billion in the third quarter, a 62% year-over-year increase and more than double what it generated in all of 2023, questions from influential investors doubting the sustainability of this rise are also mounting. Worse, they’re raising the specter that Nvidia’s growth is not as organic as it seems, likening it instead to one of the worst accounting scandals ever: Enron.
In particular, Nvidia is accused of engaging in a form of vendor financing through its circular funding deals with customers who receive investments from the chipmaker that are then used to purchase its AI accelerators, artificially inflating sales. Several prominent short sellers have committed billions of dollars betting on the Nvidia;s eventual collapse.
A Sharp Rebuke to the Shorts
Nvidia just lashed out against these accusations of impropriety, privately circulating a seven-page rebuttal to analysts dismissing charges of supplier-provided funding to encourage customer purchases, practices linked to Enron’s off-balance-sheet dealings and the early-2000s downfall of telecom equipment maker Lucent.
Nvidia asserts that, unlike Lucent, it does not depend on such arrangements to drive revenue. The company highlights that its customers typically settle invoices within an average of 53 days, reflecting a straightforward sales process for high-performance products. Nvidia discloses all significant investments, including its minority interest in AI cloud provider CoreWeave (NASDAQ:CRWV), which it describes as a typical supplier-customer dynamic without undisclosed loans or circular transactions.
It also points out that major cloud operators like Meta Platforms (NASDAQ:META) and Microsoft (NASDAQ:MSFT) finance their AI expansions primarily through their own low-cost borrowing, rather than relying on Nvidia.
The statement followed Nvidia’s fiscal third-quarter earnings released last week showing strong demand and seeking to bolster Wall Street’s trust following its stock falling 16% from the all-time high reached in late October.
Short Sellers Are Doubling Down
The memo hasn’t convinced leading short sellers, who see Nvidia’s expansion as vulnerable to overoptimism and concealed vulnerabilities. Famed investor Michael Burry has led the charge, revealing massive put options on Nvidia stock, which would generate large gains if shares fall. While he subsequently closed his Scion Asset Management hedge fund because he preferred to make such big bets privately when his thinking runs so counter to prevailing sentiment, he blasted the chipmaker on X after its earnings report, claiming “suspicious revenue recognition” practices.
Jim Chanos, the short-selling expert who uncovered Enron’s irregularities in 2001, echoed these doubts. He also maintains a short position in Nvidia through options and labels its customer-financing arrangements as “Lucent 2.0.” Chanos contends that off-balance-sheet borrowing by AI ventures, including Elon Musk’s xAI, to acquire chips introduces instability if AI growth stalls.
In a Yahoo Finance interview, he stated, “Putting lots of credit and really arcane financial structures on top of these money-losing entities is the real Achilles heel.”
More Investors Signal Caution
Activist investor Elliott Management, which oversees about $70 billion, has been betting against Nvidia since the fourth quarter of 2024 filings, disclosing its own put options with at least $600 million in potential downside exposure to Nvidia. Founder Paul Singer’s firm has avoided “Magnificent Seven” stocks, describing AI as overhyped in letters to clients and viewing Nvidia as reliant on excessive capital spending by major technology companies.
Beyond just shorting Nvidia stock, SoftBank sold its entire holding of 32.1 million Nvidia shares in October for $5.8 billion, though it described the transaction as simply asset monetization to support other investments. But as the sale occurred near Nvidia’s October peak of $212 per share, it amplified concerns about overvaluation.
Similarly, Peter Thiel’s Founders Fund closed out its entire Nvidia position in the third quarter, a holding that had accounted for 40% of its portfolio at the end of Q2. Thiel — co-founder of Palantir Technologies (NASDAQ:PLTR) and a noted critic of AI’s immediate commercial viability — shifted resources to Tesla (NASDAQ:TSLA), Microsoft, and Apple (NASDAQ:AAPL), indicating reservations about AI’s short-term profitability, although each of those companies are also making big AI investments.
Key Takeaway
The accusations from prominent short sellers against Nvidia that its customer investments mask artificial demand through vendor financing are opinion, not fact. The chipmaker laid out a solid defense, stressing its transparent accounting and rapid customer payments.
Although the accusations have the ring of truth, investors should recognize Nvidia’s strong fundamentals backing up its claims. While there will undoubtedly be a slowdown in AI spending eventually — no trend goes on forever — Nvidia as the “Enron of AI” seems a stretch for what is proving to be a transformational technology.