Michael Burry's Nvidia Bear Case: Valuation Risks and Fraud Allegations in the AI Chip Market

Michael Burry, famed for foreseeing the 2008 housing crash, has turned sharply bearish on Nvidia, deploying $1.1 billion in options against the chipmaker and Palantir amid worries about an AI valuation bubble. His public warnings and large bets coincided with Nvidia stock dips, reviving debate over whether soaring AI company valuations are justified. While Burry's historical track record lends weight, current market skepticism remains broad and lacks specific 2024 audit concerns cited in Nvidia's filings. His analysis suggests Nvidia systematically understates stock-based compensation, artificially inflating owners' earnings by roughly half. The company strongly rejects any Enron-like fraud allegations, pointing to transparent US-GAAP reporting in its latest SEC filings as proof of sound accounting. This core disagreement intensified after Nvidia's stock fell 10% on AI valuation worries and criticism of its defensive memo, which some deemed inadequate disclosure. Burry, however, maintains his stance, arguing deeper flaws exist across the AI industry's accounting and financing practices. Despite Nvidia's robust cash flow generation and market dominance, the valuation pressure spotlighted by Burry highlights potential frictions in sustaining current price levels if growth expectations shift. Investors should note that while Burry's past calls carry influence, his current thesis lacks publicly disclosed detailed evidence substantiating the 50% earnings inflation claim, leaving room for further market debate.

AI Chip Market: Strong Demand, Significant Risks

The AI chip market continues to show explosive growth, driven by insatiable demand for specialized hardware. Deloitte projects the generative AI chip segment alone will exceed $50 billion in revenue in 2024, fueled by high demand despite ongoing supply constraints and geopolitical trade restrictions. Long-term, Deloitte forecasts this market could expand dramatically, reaching up to $400 billion by 2027, highlighting the immense potential for companies at the forefront of this technology. This growth is underpinned by massive investments in manufacturing capability. SEMI forecasts advanced chipmaking capacity (specifically 7nm and below) will surge by 69% between 2024 and 2028, reaching 1.4 million wafers per month, supported by $50 billion in capital expenditures and the acceleration of 2nm production starting in 2026.

However, this rapid expansion carries significant risks. Deloitte analysts caution that this environment could foster a potential "bubble" if enterprise AI adoption fails to meet current lofty expectations. The warning draws parallels to past cycles in sectors like crypto mining, where a sudden collapse in demand led to severe market contractions in 2025. While current shortages and elevated prices persist, the long-term $400 billion growth forecast is contingent on sustained enterprise adoption and overcoming shifting demands towards edge computing and persistent geopolitical supply chain challenges. The sheer scale of the projected capacity increase also raises concerns about future oversupply if demand growth stalls, making the execution and timing of AI adoption across major industries critical to avoiding a painful correction.

Earnings Quality and Financial Health

Nvidia's latest earnings report drew sharp scrutiny over financial reporting practices, even as core results remained robust. The company strongly denied allegations of misreporting tied to its AI hardware depreciation schedules, defending its accounting as fully compliant with standards. It highlighted substantial cash generation, reporting $23.8 billion in operating cash flow and $22.1 billion in free cash flow for Q3 2025, alongside a $3.7 billion strategic investment during the quarter. While the company rejected claims of "circular financing," it acknowledged the inherent complexity of valuing rapidly depreciating AI chip investments.

Profitability continued to surge, with record Q3 revenue reaching $57 billion, a 62% year-over-year increase driven by overwhelming demand for its AI accelerators according to financial reports. CEO Jensen Huang expressed confidence in future growth, projecting $500 billion in revenue from upcoming Blackwell and Rubin architectures by late 2026. However, this financial strength exists alongside significant criticism regarding capital allocation. Nvidia's aggressive $112.5 billion stock buyback program since 2018, while bolstering liquidity, has been accused by investors like Michael Burry of merely offsetting the dilution from stock-based compensation, which increased shares outstanding by 47 million. The program's effectiveness in creating long-term shareholder value remains debated, particularly as the company faces high future capital expenditure needs for AI infrastructure expansion.

Risk and Fraud Concerns Deep Dive

Michael Burry, famed for spotting the 2008 housing bubble, has issued stark warnings about Nvidia, suggesting its AI-fueled valuation could collapse. He argues the core issue is overstated chip longevity. Burry contends Nvidia's practice of depreciating older A100 chips over longer periods than justified makes current profits appear stronger than they are, similar to airlines keeping unprofitable planes flying to hide losses. This extended depreciation period, potentially covering 2026-2028, is estimated industry-wide to have understated depreciation costs by $176 billion, a claim Burry uses to question Nvidia's profit sustainability.

These longevity claims directly impact user costs. Burry points out that older hardware, like the A100, is often far more energy-inefficient than newer models. This inefficiency translates into significantly higher electricity bills for businesses running large AI data centers, eroding the total cost of ownership savings Nvidia promises. While Nvidia highlights its CUDA software ecosystem prolonging chip utility, Burry sees this as obscuring the true economic burden on customers.

Allegations of Enron-like accounting practices surfaced in 2024, centering on Nvidia's investments in firms dubbed "neocloud." Critics claim these investments artificially inflate Nvidia's sales figures, drawing uncomfortable parallels to the accounting tricks that brought down Enron. Nvidia has firmly denied using special purpose vehicles to hide debt, but analysts note the partnerships, though legal, resemble speculative bets. If the AI chip market experiences a significant correction, these investments could force substantial write-downs, further burdening Nvidia's balance sheet and potentially flooding the market with discounted chips.

Furthermore, the nature of Nvidia's key partnerships raises transparency concerns. Burry specifically calls out opaque "give-and-take" arrangements with major AI players like OpenAI and Microsoft. The lack of clarity on how these deals are structured and valued makes it difficult for investors to assess their true impact on Nvidia's revenue and long-term relationships. While Nvidia points to record earnings and a booming AI infrastructure forecast as proof of its strength, the underlying risks Burry highlights – inflated profits, hidden costs, speculative investments, and murky partnerships – create a complex web of potential vulnerabilities. The absence of proven fraud doesn't eliminate the scrutiny these practices attract, demanding careful investor vigilance.

Catalysts and Investor Implications

Nvidia's near-term narrative is split between explosive growth potential and mounting regulatory friction, creating volatility that demands cautious positioning.

The most immediate risk comes from activist investor Michael Burry, who publicly accused Nvidia of fraud and circular financing in Q3 2025, claiming the company understated AI hardware depreciation by $176 billion industry-wide through 2028. According to Nvidia's response, Nvidia shot back with a defensive memo rejecting all allegations, emphasizing transparent accounting standards and citing $23.8 billion in operating cash flow and $22.1 billion in free cash flow during the quarter. While Nvidia insists no SEC investigation exists, Burry's accusations-combined with his $500 million short position-inject significant uncertainty that could trigger regulatory scrutiny.

Amid this backdrop, Nvidia projects staggering revenue growth. CEO Jensen Huang expects $500 billion in sales from its next-gen Blackwell and Rubin GPUs by late 2026, building on record Q3 2025 results that hit $57 billion (up 62% YoY) according to financial reports. However, this optimism faces headwinds. Burry also criticized Nvidia's $112.5 billion in stock buybacks since 2018, arguing they masked dilution and failed to create shareholder value as shares rose 47 million. The conflict between growth ambitions and capital allocation practices creates a tension that could dampen investor confidence if not resolved.

For risk-averse portfolios, volatility spikes warrant caution. The Burry controversy alone meets our "regulatory uncertainty" signal, suggesting position reduction rather than aggressive buying. Even if Nvidia hits its $500 billion target, execution risks remain-especially if depreciation accounting comes under closer scrutiny or AI demand softens. Until the regulatory cloud clears, we'll prioritize cash preservation over chasing growth narratives.