Michael Burry: Nvidia stock is undervalued, but caution is warranted

Nvidia NVDA shares ripped higher on Thursday morning after the AI behemoth reported market-beating financials for its fiscal Q2 and issued remarkable guidance for its current quarter.

Yet, famed investor Michael Burry – known for accurately predicting the 2008 housing collapse – is urging investors to practice caution in playing NVDA at current levels.

Despite a blowout release, he maintains a significant short position against Nvidia stock that’s now hovering around its year-to-date high.

Burry says Nvidia stock is wildly undervalued

Burry’s stance on NVDA shares is far more nuanced than a typical bearish bet.

In a Substack post detailing his case, the Scion Asset Management founder acknowledged that the giant’s commanding market share in GPUs, accelerating sales growth, and a relatively modest P/E ratio of about 24x make it appear  “wildly undervalued” on paper.

But the conventional valuation screens often overlook cyclical turnarounds, temporarily disguising long-term competitive risks behind a deceivingly low earnings multiple, he added.

Why he still favors caution in playing NVDA shares

The primary reason Burry remains guarded on Nvidia shares centers on market longevity and capex cycles.

According to him, the company’s present earnings power relies heavily on an unprecedented, front-loaded AI buildout by hyperscalers – a pace of capital outlay that may prove “difficult to maintain” once initial datacenter builds reach saturation.

As cloud giants eventually digest their hardware spending, and rival chipmakers eat into NVDA’s pricing power, profit margins could face structural pressure.

Short-term momentum vs long-term durability

Ultimately, the clash over NVDA stock highlights a “fundamental rift” between near-term market momentum and long-term fundamental durability.

Wall Street continues to celebrate the behemoth’s flawless operational delivery and record-breaking quarterly runs, driving the stock higher on every bullish catalyst.

Conversely, value-focused macro investors like Michael Burry are looking past the current “hype” cycle, warning that peak earnings conditions rarely last forever in hyper-competitive tech hardware markets.

Note that from a technical perspective, Nvidia’s relative strength index (RSI) now sits in the mid-60s, indicating the stock is now approaching “overbought” conditions, which often trigger profit-taking in the near-term.

How Wall Street recommends playing Nvidia Corp

Despite Burry’s caution, however, the options market sentiment remains largely bullish for NVDA. Yet, some on Wall Street share his pessimism.

While the consensus rating on Nvidia Corp sits at Strong Buy currently, the lowest price target on the AI giant remains at $172, indicating potential downside of about 30% from current levels.

For now, however, Nvidia’s growing sales and unquestioned market dominance continue to silence skeptics.

However, history shows that capex supercycles always end eventually. As institutional investors weigh August’s rally against long-term risks, Burry’s warning serves as a sobering reminder: in hyper-growth tech, riding short-term momentum without structural downside protection can carry a severe cost.