Prediction: The $500 Billion Reason Nvidia Stock Will Show Bearish Billionaire Michael Burry Who Is Boss

Last week, the tech-heavy Nasdaq Composite index dropped 3%, which was its worst week since April. The other major indexes were also down.

This sell-off, which hit tech stocks the hardest, was sparked on Tuesday by the revelation that well-known billionaire Michael Burry's Scion Asset Management hedge fund made big bearish bets on artificial intelligence (AI) stock darlings Nvidia (NASDAQ: NVDA) and Palantir Technologies (NASDAQ: PLTR) in the third quarter.

Shares of Nvidia and Palantir declined 7.1% and 11.2%, respectively, last week. Nvidia is the leader in AI chips and related tech and is largely responsible for enabling the AI revolution. Palantir operates an AI-powered data analysis platform.

Burry's bets against Nvidia and Palantir were disclosed in a Securities and Exchange Commission (SEC) Form 13F filing. These forms show a fund's holdings and are required to be filed within 45 days after the end of every quarter.

Image source: Getty Images.

Who is Michael Burry?

Burry's name recognition stems in part from his being the subject of the 2015 film The Big Short, based on a book of the same name.

He predicted the subprime mortgage crisis, which led to the popping of the real estate bubble. And this event contributed to the 2008 financial crisis and the Great Recession. Burry and his investors made huge bucks from his short bets, which is an oversimplification of what he did, but suffices here. (Short-sellers are betting that a particular stock or other financial instrument or the entire market will decline.)

The "Big Short" deserves "big kudos" for his prediction. That said, it doesn't seem to me that the skillset that would allow a person to analyze the subprime real estate market is the same skillset needed to predict what investors in the stock of Nvidia, which -- very relevantly -- is growing revenue and earnings like gangbusters, will do.

Burry's bearish bet on Nvidia stock

Burry bought 1 million Nvidia put options with the underlying stock valued at $186.6 million at the end of the third quarter. Options (calls and puts) are commonly sold in contract sizes of 100 shares of the underlying stock, so Burry purchased 10,000 Nvidia put contracts.

We don't know exactly when he bought these options, only that they were purchased between July 1 and Sept. 30. We also don't know other details, such as their costs, strike price, or expiration dates.

The BIG $500-billion-dollar reason the Big Short's bearish bet on Nvidia stock is poised to lose

There are several reasons that I believe Burry's bearish bet on Nvidia stock will turn out to be a losing bet. But I'll keep things simple and just focus on what I consider to be the biggest reason. I'll let Nvidia CEO Jensen Huang "speak," and then I'll expound and add context:

We have visibility into a half a trillion dollars of cumulative Blackwell and early ramps of Rubin through 2026. ... So, next 5 quarters, there is a half a trillion dollars [of demand].

This quote comes from Huang's keynote address on Oct. 28 to kick off the company's first GTC (GPU Technology Conference) in Washington, D.C., during the last week of October. (GPU stands for graphics processing units, which are Nvidia's core semiconductors, or chips.)

Before we move further, notice the date of Huang's remark. It was about one month after the end of the third quarter, which means that Burry was not privy to it (or the other great news shared at GTC D.C.) when he made his bearish bet on Nvidia stock. (That is, unless Huang shared it before, which I don't think is the case.)

In Huang's statement, Blackwell refers to the architecture of Nvidia's AI-enabling data center GPUs that are in the early stages of shipping, and Rubin refers to the company's next-generation GPUs, expected to begin shipping in roughly a year.

So, Huang has "visibility" into $500 billion of demand for its key data center technology over about five quarters. This demand is humongous! Let me put it in context.

In its fiscal second quarter (ended in late July), Nvidia's data center platform's revenue was $41.1 billion, which was 88% of its total revenue.

If we assume Nvidia is able to fulfil the demand for $500 billion in five quarters, that equates to an average of $100 billion per quarter. That's 2.4 times the data center revenue in the most recently reported quarter.

Even if we assume that Nvidia can't fulfill that entire $500 billion demand by the end of 2026, its data center sales are still poised to explode, as you can see by these numbers.

What if that $500 billion demand doesn't materialize?

It's highly unlikely that companies that have orders or other buy commitments or buy plans for Nvidia data center GPUs and related tech will back out of them. Doing so would mean they'd likely go to the back of the (usually long) line, so to speak, if they wanted to buy them in the future.

I have no doubt that the leaders of the big tech companies -- which are the major buyers of Nvidia's data center chips and other tech -- and many other companies realize they cannot risk falling behind their competitors in AI capabilities. If they do so, they might never catch up, and their businesses will likely suffer.

What if there's an economic downturn? This is a good news-bad news answer. I think the big tech companies that are the main buyers of Nvidia's data center GPUs will lay off more employees rather than cut their spending on AI in the event of an economic downturn. If they do cut their spending on AI, it won't be by much.

In short (pardon the pun), betting against the stock of a company like Nvidia, which has powerful financial performance and demand dynamics and a reasonable valuation, is very risky. Michael Burry's bearish bet is more likely to be a loser than a winner, in my view.

As to Nvidia stock's valuation, as of Friday's market close, its forward price-to-earnings (P/E) ratio is 29.9, which is very reasonable for a company that Wall Street expects to grow earnings per share (EPS) at an average annual rate of 40% over the next five years. Moreover, Nvidia nearly always beats the analyst consensus earnings estimate, which means its forward P/E (which is based on Wall Street's projected EPS over the next year) is likely to turn out to be overstated.

Beth McKenna has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Palantir Technologies. The Motley Fool has a disclosure policy.