‘Big Short’ Investor Michael Burry Turns Attention to Semiconductors: Does Nvidia Have to Fear?

Micheal Burry, the investor who rose to fame for anticipating the collapse of the US housing market and a subsequent Wall Street crash in 2008, has decided to bet big once again against semiconductor markets. Has the ‘Big Short’ star made another major call?

Burry’s hedge fund, Scion Capital, opened two new positions in recent weeks, one focused on shorting 100,000 shares of BlackRock’s semiconductor ETF, the iShares Semiconductor ETF (SOXX), and the second shorted 2,500 shares in the online travel website Booking Holdings Inc. (BKNG).

Scion Capital’s shorting activity has ramped up in 2023, with the hedge fund recently closing out ‘put’ positions on the SPDR S&P 500 ETF (SPY) and Invesco QQQ Trust (QQQ) at the end of September, with QQQ tracking the performance of the Nasdaq 100 index.

But why has BlackRock’s iShares Semiconductor ETF been targeted? And should Wall Street be worried about Burry’s latest ‘Big Short’ coming to fruition?

Shorting SOXX

The iShares Semiconductor ETF (SOXX) is an exchange-traded fund that has gained almost 50% in the 2023 calendar year thanks to sustained exponential growth among key players like Nvidia Corp. (NVDA) and Advanced Micro Devices Inc., among other chipmakers.

In shorting 100,000 shares in SOXX, Burry’s bet against the ETF amounts to around $47 million, according to Scion Capital’s 13-F filing with the SEC in mid-November.

Opting to short SOXX is likely to raise many eyebrows throughout Wall Street and comes as a clear indication that Burry believes the ETF to be overvalued.

Despite significant volumes of hedge funding arriving into semiconductor firms off the back of 2023’s generative AI boom, it’s clear that some investors believe that the market has begun to overvalue some key semiconductor firms like Nvidia, which power artificial intelligence services.

While Nvidia’s stock has grown nearly 250% in 2023, the iShares Semiconductor ETF has consistently shown outperformance in recent years, exhibiting 38% growth over the past year, 207% growth over five years, and a monumental 600% growth since its launch in July 2001.

Should the Semiconductor Market be Worried?

As one of the stars of the semiconductor landscape, it’s worth looking at the sustainability of Nvidia as an indicator of the long-term viability of the semiconductor industry.

Because of the AI boom, demand for Nvidia’s semiconductors is growing, even in spite of China’s export ban on high-end AI chips.

But rapid growth can often lead to inflated valuations, and accompanying Michael Burry’s SOXX short is renowned investor George Soros, who cut his stake in Nvidia through Q3 2023, according to recent 13F filings.

Should the semiconductor market be worried about this falling positive sentiment among some of Wall Street’s most notable players? Probably not when it comes to factoring in long-term growth.

Nvidia is a stock that has built a key presence across multiple emerging industries that extend way beyond generative AI. In a future that could be built on autonomous driving and transport, semiconductors are likely to find an even greater purpose.

In terms of Nvidia’s exposure to the automotive industry, an annual revenue run rate of around $1 billion could become $300 billion once the technology gathers pace, the semiconductor giants anticipate.

Furthermore, Maxim Manturov, head of investment research at Freedom Finance Europe, has suggested that Nvidia’s prospects extend even further, with GPUs capable of enhancing “the user experience on computing platforms, particularly in PC gaming applications.”

“Nvidia offers not only GPUs for artificial intelligence but also the Cuda software platform used to develop and train artificial intelligence models. Nvidia is also expanding its data center networking solutions to help connect GPUs to handle complex workloads,” Manturov explains.

Competitivity and Innovation Remain a Long-Term Challenge

Although it’s highly likely that demand for semiconductors won’t be declining any time soon, we may see more volatility arrive in the industry as competition intensifies and the quest for innovation becomes more challenging.

In November, Microsoft announced its entry into creating bespoke chips for AI programs in the cloud as Nvidia’s market dominance begins to come under new levels of scrutiny.

The development of two new processors, one built on a general-purpose chip based on Arm designs called Cobalt and another specialized AI accelerator named Maia, is set to be deployed through Microsoft’s Azure data centers and will provide support for services such as OpenAI and Copilot.

In addition to this, shrinking semiconductor transistor sizes are making the steady progress experienced in years gone by considerably more difficult.

“Deep learning was powered by hardware. We feel great pressure to continue,” warned Bill Dally, chief scientist at Nvidia.

“It’s getting harder, but we still have good ideas…out to like four years out, we’ve got a pretty good idea of where the performance is coming from. And we have a lot of exploratory efforts to answer the question about where the performance is going to come from after that.”

Volatility and Sustainability

This uncertainty could bring more volatility to the high-performing semiconductor stocks of today, but a dedication to innovation is likely to ensure their long-term relevance to the market.

While the likes of Michael Burry and George Soros appear to be anticipating a semiconductor market correction, the stocks remain as pertinent as ever in a world likely to lean heavily on the future of artificial intelligence.