According to Burry, a good deal of contribution to NVIDIA profits came because chips are being used for longer than the normal 3-4 years. Despite being less energy efficient, the older chips are being used because they are already fully depreciated and do not entail any cost on the income statement (albeit non-cash). However, Burry has pointed out that just because something is being used, it does not mean it is also efficient.  In this case, according to Michael Burry, the extension of the life of the chips is only permitting the company to show higher profits today due to artificially lower depreciation. 

Another major criticism of the AI story by Michael Burry has been that there are just too many quid pro quo deals in the AI market. According to Burry, the so-called surge in demand for AI services from the general market is still a myth that is not proven. For instance, Burry has pointed to the tangled web of multibillion dollar deals, which look like nothing but “give and take” deals. Burry points out that most of the purported AI-deals are happening between NVIDIA on the one side and other companies like Microsoft, Oracle, and Open AI on the other side. This does raise questions on genuineness. 

This is perhaps the most serious allegation made by Michael Burry against NVIDIA in particular and AI companies in general. Most of these high-technology companies offer cash-based compensation combined with stock-based compensation. However, when stock-based compensation is offered by the company, there is a cost to the company, which must be properly and transparently accounted for. According to Burry, that is not happening. For instance, since 2018, the officially disclosed stock-based compensation (SBC) cost for NVIDIA was $20.5 billion. However, buybacks in this period have been more than $113 billion, indicating that stock-based compensation could halve current earnings of NVIDIA, if properly accounted for. 

Clearly, Jensen Huang and NVIDIA have the upper hand for now. The stock of NVIDIA has continued to rally, but one must not ignore that the stock of NVIDIA has fallen 14% since these concerns were first flagged by Burry. Most of the brokers continue to remain bullish on the NVIDIA stock despite its elevated market cap, and are pegging upsides of 25%-40%. However, the more proactive hedge fund managers are starting to get concerned about real challenges like the tangled web of IT companies and not showing the SBC in right earnest. Back in 2008, Burry waited for more than 2 years to look smart. It remains to be seen; whether and when Burry will manage to puncture the AI bubble!