Rising Inventory Signals Margin Risk Ahead
Here's what I mean by "needs more scrutiny".
$NVIDIA(NVDA)$ 's inventory falls when demand starts picking up in a cycle. In 2023, ChatGPT is exploding and GPU demand is off the charts, so inventory days (green below) drops.
NVIDIA's inventory typically builds as the rate of growth slows. But there's a lag from the build of inventory to the drop-off in growth to historically eventually negative revenue growth.
The reason this is important is the orange line, which is gross margins (pricing power). NVIDIA's high profits are driven by high margins. If inventory rises and pricing power falls, margins fall as well.
Maybe the cycle continues, maybe it doesn't. But it's something you should consider given the regular drawdowns of 50%+ that NVIDIA goes through in these cycles.
This deserves some scrutiny.
Inventory rising as growth slows is normally a 🚩.
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