Nvidia (NVDA) Creative Accounting and Questionable Earnings Growth
Nvidia's approach of using its chips as collateral for debt financing highlights a significant trend where AI technology impacts financial markets, raising ethical concerns about dependency on Nvidia's products.
The company's accounts receivable have surged, with projections indicating a rise to $17.7 billion** for fiscal year 2025. This increase raises questions about revenue recognition practices, suggesting potential premature recognition or lenient credit terms. Furthermore, Nvidia's revenue is heavily concentrated among a few major customers, some of whom are developing their own AI chips. This concentration poses risks to Nvidia's financial stability if these customers decide to shift away from its products.
Wall Street has established a debt market where over $11 billion has been loaned to companies using Nvidia chips as collateral. For instance, CoreWeave secured a $2.3 billion debt facility backed by Nvidia's H100 GPUs to expand its operations. However, existing collateral may depreciate quickly with the release of newer models, jeopardizing the financial stability of companies reliant on these loans.
Nvidia's strategy of partnering with startups not only boosts revenue through increased chip sales but also raises ethical questions about creating dependency on its products. Approximately 46% of Nvidia's revenue comes from a small group of customers who have received investments from the company. In the third quarter of fiscal 2025, three unnamed customers accounted for 36% of Nvidia's revenue, approximately $12.6 billion.
Summary of Receivable Growth
- 2020: $1.657 billion
- 2021: $2.429 billion (46.5% increase)
- 2022: $4.650 billion (91% increase)
- 2023: $3.827 billion (17.7% decrease)
- 2024: $9.999 billion (161% increase)
- Projected 2025:** $17.7 billion
Comparison of Revenue and Receivables
| Company | Revenue (2024) | Receivables (2024) | Revenue (2025) | Receivables (2025) |
|------------------|----------------|---------------------|----------------|---------------------|
| Nvidia (NVDA) | $60.92 billion | $9.999 billion | $111.3 billion | $17.7 billion
| Apple (AAPL) | ~$400 billion | ~$20 billion | ~$400 billion | ~$20 billion
| Microsoft (MSFT) | ~$230 billion | ~$30 billion | ~$230 billion | ~$30 billion
| Amazon (AMZN) | ~$500 billion | ~$30 billion | ~$500 billion | ~$30 billion
| Alphabet (GOOGL) | ~$300 billion | ~$25 billion | ~$300 billion | ~$25 billion
| Micron (MU) | ~$30 billion | ~$4.5 billion | ~$30 billion | ~$4.5 billion
The rapid increase in receivables could indicate aggressive revenue recognition practices that inflate short-term earnings while deferring risks that might arise later. High accounts receivable can hinder cash flow generation from new sales if existing customers are not paying their outstanding invoices promptly.
Moreover, if a significant portion of these receivables is concentrated among a few major customers facing financial difficulties, it could disproportionately impact Nvidia's financial stability.
Concerns are further amplified by notable customers like Super Micro Computer Inc., which is experiencing governance and transparency issues after its auditor resigned due to concerns over internal controls.
Key Risks Identified
- **Customer Concentration Risk:** A significant portion of revenue relies on a few customers.
- **Circular Dependency:** Investments in customers create conflicts of interest.
- **Alarming Receivables Growth:** Receivables have grown substantially compared to revenue.
- **Systemic Financial Risks:** The creation of a debt market backed by GPUs introduces new risks if GPU values depreciate rapidly.
The patterns observed in Nvidia's financial practices bear similarities to past accounting scandals involving companies like Enron and Lehman Brothers, characterized by rapid receivables growth and complex financing arrangements that could lead to significant financial instability if not managed carefully.
In summary, while Nvidia's growth strategy may yield short-term gains, it raises serious concerns about long-term sustainability and ethical governance within the company and its relationships with customers and investors alike.