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The market is testing a new narrative for NVDA. This will be a bull and bear ferocious fight, but the current bear thinking is the following:

1. Overcapacity Risk in Semiconductors: The AI Bubble Narrative

Key Issue: Overinvestment Based on Overhyped Demand

NVIDIA’s meteoric rise has been fueled by the generative AI boom, but history shows that tech hype cycles often result in overcapacity (e.g., dot-com bubble, cryptocurrency mining GPUs).

Revenue from Data Center GPUs accounted for 87% of total revenue in Q3 FY2024, making NVIDIA heavily reliant on AI demand continuing indefinitely​.

A 10% slowdown in AI investments or hyperscaler spending (e.g., Microsoft, Amazon, Google) could drastically impact NVIDIA’s revenue.

Overcommitted to Supply: NVIDIA has locked in $28.9 billion in supply commitments, expecting ongoing high demand for its Hopper and Blackwell architectures​.

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If demand slows or product transitions are delayed, these commitments could lead to massive inventory write-downs, hurting margins.

Why It Matters for a Short Thesis:

The semiconductor market is notoriously cyclical. Any downturn in demand could expose NVIDIA to falling prices, unsold inventory, and margin compression. Overcapacity could turn into a pricing war with competitors like AMD and Intel, further eroding profitability.

2. NVIDIA’s Dependence on Hyperscalers and China

Key Issue: Revenue Concentration in Fragile Markets

NVIDIA’s largest customers, such as Amazon, Microsoft, and Google, account for a significant portion of its revenue. If even one reduces AI-related spending due to budget cuts or cost discipline, the effect on NVIDIA would be severe​.

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15% of NVIDIA’s Q3 2024 revenue came from China and Hong Kong​. Tightened U.S. export restrictions on advanced chips to China could shrink this critical market further. If restrictions extend to Blackwell chips (NVIDIA’s next-gen architecture), this could limit growth and lead to unsold inventory.

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Why It Matters for a Short Thesis:

Geopolitical risk combined with hyperscaler reliance creates an unsustainable revenue model in a downturn. NVIDIA’s revenue base might not be diversified enough.

3. Valuation Disconnect: Growth Premium Priced for Perfection

Key Issue: An Unsustainable Price-to-Sales (P/S) Ratio

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NVIDIA’s stock trades at a forward P/S ratio far above industry peers, priced as if AI adoption will grow exponentially for years. This valuation leaves little room for error:

Market expectations assume continued exponential growth in AI-related revenue. Any sign of slowing demand or margin compression could cause a violent repricing of the stock, as investors adjust to more realistic growth assumptions. The market isn’t pricing in the risks of:

AI demand plateauing.

Cyclical overcapacity in GPUs.

Geopolitical and competitive pressures.

Why It Matters for a Short Thesis:

NVIDIA’s valuation could collapse under its own weight if the AI hype cycle wanes or fails to deliver on promises.

4. Structural Weaknesses in Business Model

Key Issue: Dependence on High Margins and R&D Investments

NVIDIA has exceptional gross margins (~74.5% in Q3 FY2024), but these margins are vulnerable to:

Increased competition from AMD, Intel, and emerging players.

Overcapacity, leading to price wars.

Rising R&D and supply costs to maintain its technological edge.

R&D Bloat: R&D spending has ballooned to $9.2 billion for FY2024 (up 48% YoY)​.

If AI demand falters, these costs become unsustainable.

Product Transition Complexity: NVIDIA’s accelerated product cadence (e.g., Hopper, Blackwell) increases risks of inventory obsolescence, supply chain inefficiencies, and customer confusion​.

Why It Matters for a Short Thesis:

Any disruption in high-margin segments or R&D inefficiencies could create cascading financial problems for NVIDIA.

Catalysts for the Short Thesis

Demand Plateau: AI adoption slows as hyperscalers optimize costs and customers hesitate on ROI for generative AI investments.

Geopolitical Restrictions: Escalating U.S.-China tensions lead to further export bans, limiting NVIDIA’s market.

Earnings Miss: A single revenue or margin miss due to overcapacity or demand shortfall could trigger a rapid market repricing.

Valuation Correction: Investors may rotate out of “story stocks” like NVIDIA during a broader market downturn.

Conclusion:

I am not really picking on this whole battle, I am only trying to collect my thoughts and understand what the emerging side (bears) is seeing. I think the previous paragraphs capture it well. The price action will be a mess with violent reversals.

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