Nvidia’s current financial position looks rock solid to say the least. But the financial engineering it is using to keep revenue growing introduces risks that could eventually cause real pain.
And it made off-the-books guarantees to distributors of its products, according to an SEC complaint in 2004 that resulted in a settlement. Nvidia also recently signed deals with two young cloud-computing companies in Australia where it acts as a customer of last resort if they can’t find others to rent their computing power to. In exchange, Nvidia gets a share of the companies’ revenue from those assets above an agreed-upon level. The backstops give lenders confidence to extend financing with which the companies buy Nvidia’s chips. There is thus some logic in Nvidia trying to generate sales from smaller and less-creditworthy companies. But history also provides examples of companies for whom courting less-creditworthy customers backfired spectacularly. In the dot-com bubble, telecom-equipment leaders like Lucent Technologies, which was spun out of AT&T in the mid-1990s, sought to court a new breed of small-time operators created following industry deregulation in the U.S. To boost sales in a fast-growing market, Lucent extended financing to these less-creditworthy customers for purchases of its products. It guaranteed third-party loans to customers. It agreed to buy back any unsold equipment from those distributors, but improperly recognized the sales to distributors as revenue, the SEC alleged. “Does this become the principal way of financing these data centers, and the chip company provides backstops? That would be more concerning, in my view. Participating in a larger slice of the industry downstream of those chips, including lease backstops, residual-value guarantees and even equity stakes in customers, compounds the risks of an eventual weakening in AI chip demand. Instead of a simple reduction in revenue and profit, a downturn scenario could stress Nvidia’s balance sheet. Reductions in the value of its investments could hit profit further.
“The question is, is this a trend?” said Wolfe Research analyst Chris Caso.
