Nvidia (NVDA) sent a memo to Wall Street analysts over the weekend arguing that it is not engaged in vendor financing, a controversial practice in which suppliers invest in or extend loans to their own customers.
Famed short sellers Jim Chanos and Michael Burry aren’t so sure.
Nvidia wrote a seven-page document — first reported by Barron’s on Tuesday morning — rebuffing claims that it invests in its own customers to inflate its revenue. The memo was written in response to a newsletter from a little-known Substack author last week claiming that the $5 trillion AI chipmaker is engaged in a “circular financing scheme” — using vendor financing to boost sales — drawing parallels between Nvidia and famous dot-com era accounting frauds committed by Enron and Lucent.
Enron is notorious for manipulating its accounting and using off-balance sheet debt to hide losses in its broadband business during the internet boom. Internet infrastructure provider Lucent, meanwhile, is best known for aggressively investing in and extending loans to many of its loss-making telecom customers — who then used the funds to buy Lucent equipment that they couldn’t have otherwise afforded. When the dot-com bubble burst and telecom startups couldn’t pay back Lucent, the company had to write down revenue tied to those transactions and lost billions of dollars.
Chanos, who is famous for predicting the fall of Enron, thinks the comparison between Nvidia and Lucent bears weight.
“They’re [Nvidia is] putting money into money-losing companies in order for those companies to order their chips,” Chanos told Yahoo Finance in an interview.
Nvidia has invested heavily in its own customers — from ChatGPT developer OpenAI (OPAI.PVT) to Elon Musk’s xAI (XAAI.PVT) to a slew of AI cloud firms, including CoreWeave (CRWV) and Nebius (NBIS) — and those investments have raised eyebrows on Wall Street.
“NVIDIA does not resemble historical accounting frauds because NVIDIA’s underlying business is economically sound, our reporting is complete and transparent, and we care about our reputation for integrity,” Nvidia wrote in its memo, which was obtained by Yahoo Finance.
“[U]nlike Lucent, NVIDIA does not rely on vendor financing arrangements to grow revenue,” the company continued. Nvidia noted that in typical vendor financing agreements, customers pay back suppliers over years. Meanwhile, the chipmaker said its customers pay the company within 53 days after purchasing its chips.
Burry, the “Big Short” investor who predicted the collapse of the US housing market in 2008, went further than Chanos in a post on X last week, saying Nvidia is one of multiple companies in the AI market with “suspicious revenue recognition” due to investments in its customers.
On top of vendor financing, Chanos views the entrance of debt in the AI market as another cause of concern for investors. Like Enron, Chanos said, some of Nvidia’s customers, such as Meta (META) and xAI, are using off-balance sheet debt to finance their purchases of chips. Others, such as Anthropic (ANTH.PVT), are using traditional debt funding.
“Putting lots of credit and really arcane financial structures on top of these money-losing entities is, I think, the real Achilles heel to the AI tech market,” Chanos told Yahoo Finance on Tuesday.
But while accounting could play a role in fueling the AI bubble by artificially inflating demand for the tech, the two short sellers argue that the bigger problem is simpler: The biggest tech companies are spending billions in a rush to build AI data centers ahead of demand.
Burry claimed this weekend in a newsletter from his new Substack, Cassandra Unchained, that the AI market, like the dot-com era, is seeing “catastrophically overbuilt supply and nowhere near enough demand” — in other words, too many chips, servers, and data centers without enough underlying demand for AI applications used by businesses and consumers.
For its part, Nvidia sees the market accelerating, saying demand for its AI chips is “off the charts” in its latest earnings report and arguing against the idea of a market bubble. The company argued Tuesday that it’s “a generation ahead” of rivals, even as rising AI chip competition from Google sent the chipmaker’s stock lower before it rebounded on Wednesday.
But Chanos also thinks the rapidly accelerating AI build-out, ahead of demand, is cause for concern: “If it turns out that we don’t quite need all the data center or chip capacity, we thought we will in ’27 or ’28, you could see orders begin to be canceled, and that’s a big risk that not a lot of people are talking about.”
