🗞 The greatest earnings report of all time?

Happy Sunday! 👋 

This week we’re taking a quick look at Nvidia’s latest earnings report and the controversy surrounding their cash flow.

Let’s dive in!

The greatest earnings report of all time?

The largest company in the world, Nvidia, reported earnings on Wednesday.

They crushed estimates across the board.

In fact, since ChatGPT launched in November of 2022, Nvidia hasn’t missed estimates once.

The report was, by virtually any metric, exceptional.

They generated $96 billion in revenue, up 106% YoY, and operating margins came in at 66%, versus 61% last year.

Unprecedented growth at scale.

But it didn’t stop there.

On the earnings call following the report, Nvidia CFO Collette Kress announced that they expect to grow revenue by 70% in FY 2028 (next year).

Based on current consensus analyst estimates, that implies roughly $700 billion in revenue for next year, and assuming steady operating margins, ~$460 billion in annual operating income!

That would make Nvidia the most profitable company on the planet, and it wouldn’t be close.

However, despite issuing arguably the greatest financial guidance in the history of capital markets, the response from investors has been somewhat tepid. Shares of Nvidia are up just 4.6% following the report.

Here’s why:

In Nvidia’s 10-Q, the company mentioned that they now have $279 billion in supply and capacity purchase commitments. Up a casual 506% versus the same time last year.

These are contractual commitments from Nvidia to pay their suppliers (primarily Samsung, Micron, and SK Hynix) for a specified quantity of high bandwidth memory chips at a set price in the future.

In other words, when their suppliers build them, Nvidia is obligated to buy them.

There are a couple of ways to look at this.

On one hand, this is Nvidia strategically locking up future supply of HBM chips in a world where HBM chips are hard to come by.

On the other hand, skeptics might argue that if the tide turns, and demand from the AI infrastructure buildout slows, Nvidia will still be on the hook for these contracts.

That situation would potentially result in a major inventory build up of one of the faster depreciating assets in human history (leading-edge chips).

At the same time that Nvidia is making these commitments, they’re also extending the payback periods for their own customers. You can see this in the Accounts Receivables chart from above, and management addressed this directly on the conference call:

Again, this decision of committing to suppliers in advance while extending payment windows for customers could very well be the right strategic choice long-term. However, in the short run, it’s impacting cash flow.

Nvidia’s gap between operating income and free cash flow has never been wider.

That’s all for this week. 

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