No, Nvidia is Not Enron –The Real Nightmare is Cisco’s Ghost

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Nvidia (NASDAQ:NVDA) recently found itself in the unusual position of distributing a defensive seven-page rebuttal to Wall Street analysts, directly countering accusations of Enron-style accounting. The document, obtained by outlets like Barron's and Business Insider, dismisses claims of hidden debt, inflated revenue through special purpose vehicles, and vendor financing schemes akin to those that sank Enron, WorldCom, and Lucent in the early 2000s.

Though it doesn't name him outright, the memo clearly targets Michael Burry, the "Big Short" investor famous for spotting the 2008 housing crash. Burry's recent X posts and Substack writings have hammered Nvidia's revenue recognition, stock-based compensation, and depreciation practices for AI chips, suggesting they mask an overinflated AI bubble.

In response, Burry tweeted that he stands by his analysis, promising a fuller breakdown soon. Nvidia insists its books are transparent and its business sound, but the exchange has amplified doubts about the sustainability of the AI hype.

Nvidia as the New Cisco

On his new Substack, "Cassandra Unchained," Burry clarifies he's not labeling Nvidia an outright fraud like Enron. Instead, he positions it as the modern equivalent of Cisco Systems (NASDAQ:CSCO), the networking giant that epitomized the dot-com boom's excess before its bust. "I am not claiming Nvidia is Enron. It is clearly Cisco," Burry writes bluntly, rejecting Nvidia's memo as "disingenuous" for dodging his core points on stock-based compensation and chip depreciation.

This comparison isn't casual. In the late 1990s, Cisco dominated as the "picks and shovels" provider, supplying routers and switches to fuel the internet buildout. Telecom firms, betting on explosive bandwidth demand -- projections claimed traffic would double every 100 days -- poured billions into fiber optic networks. Cisco's revenue soared, and its stock rocketed 3,800% from 1995 to 2000, peaking at a $560 billion market cap, making it the world's most valuable company.

But reality hit hard: demand forecasts proved wildly optimistic, leading to massive overcapacity. When the bubble burst in 2000-2001, orders evaporated, inventories piled up, and Cisco's shares cratered 78% from peak to trough. The company survived but spent years recovering, its growth story shattered by the industry's indigestion.

A CapEx Apocalypse

Burry sees eerie parallels in today's AI frenzy. Hyperscalers like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Amazon (NASDAQ:AMZN), and Oracle (NYSE:ORCL) -- the "Five Horsemen" in his view -- are committing nearly $3 trillion over three years to AI data centers, snapping up Nvidia's GPUs at breakneck speed.

Nvidia, like Cisco then, is the indispensable hardware kingpin, with its market cap hitting $4.3 trillion amid 1,000% gains over three years. Burry argues this capex binge rests on "heroic assumptions" about AI's immediate returns, much like dot-com era hype. End-user demand remains "ridiculously small," he claims, with many buyers funded through circular loops -- Nvidia even invests in customers like CoreWeave (NASDAQ:CRWV), which then order more chips.

Worse, accounting practices echo the era's blind spots. Burry estimates the industry could understate GPU depreciation by $176 billion from 2026 to 2028, as firms stretch useful lives despite rapid obsolescence, overstating profits by 20% or more.

Burry says Nvidia's stock-based compensation dilutes owners' earnings by 50%, propping up reported figures. Just as Cisco's sales masked a demand cliff, Burry warns Nvidia's revenue -- boosted by supplier financing and optimistic projections -- could collapse if AI monetization falters. "Sometimes the new company is the same company on a pivot," he notes, implying Nvidia's pivot from gaming to AI mirrors Cisco's internet surge, but with the same vulnerability to overbuild.

Key Takeaway

Burry's Cisco analogy spotlights a genuine threat: overinvestment without proven demand. If AI infrastructure proves as glutted as dot-com fiber, Nvidia could face a sharp revenue drop, echoing Cisco's post-bubble slump. Margins might compress from excess inventory and pricing pressure, while accelerated depreciation hits hyperscalers' budgets, curbing orders.

For stock investors, this means volatility ahead -- Nvidia's 15% pullback from November highs hints at fragility. At current valuations, a 50% or greater correction isn't implausible if earnings disappoint, turning a growth darling into a value trap. Yet, Nvidia's moat in AI hardware remains wide and a soft landing could sustain the gains it has made.

In short, approach Nvidia with caution, don't put all your eggs in one basket, and diversify your portfolio beyond AI's hype.

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