More Tales From Nvidia: Fitch Warns About AI Credit Risks/GAAP Is Meant for a Reason (Issue #227)
Circular Deals
For nearly a year I have been warning about the circular AI financing deals.
When company A (e.g. Nvidia ($NVDA)) is funding company B (e.g. OpenAI) to buy product from them they are basically “creating” a huge discount on chip purchases and should be treated that way from an accounting perspective and amortized into the expense side of the P&L.
The company A is simply moving the discount from the P&L to the balance sheet and cash flow: The balance sheet and cash flow tell a very different story than reported earnings.
And we are not even seeing the entire balance sheets with all the off-balance sheet commitments.
Said another way, revenue and earnings are massively over-stated especially given all the operating leverage companies like Nvidia have. Buying your own revenue should have consequences for the P&L, but since it doesn’t, the grossly irresponsible behavior continues.
GAAP is meant to exist for a reason. This industry is exploiting every loophole in GAAP with these deals, off balance sheet structures, and depreciation schedules that do not reflect reality.
Meanwhile, the cost of insuring debt at Nvidia and the hyperscalers (credit default swaps) speak volumes and underscores the perception of rising AI credit risk:
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