On Nvidia’s Blowout Quarter

By all accounts, Nvidia delivered a blowout earnings report yesterday after markets closed. That’s exactly how the WSJ described it. The stock started climbing after-hours yesterday and is up over 9% for the day as I type this.

But a close read of the risk factors — and the various changes since the prior quarter — in the 10-Q that was also filed yesterday introduced a fair amount of caution that wasn’t really captured in the earnings release or the follow-up call.

Much of this new language had to do with some of the financial commitments the company is providing to various companies in the AI universe, including OpenAI and SB Energy, among others. In the WSJ’s Heard on the Street column today, reporter Asa Fitch covered some of this ground, even comparing it to what happened to Cisco Systems 25 years ago, when the company had to take a $2.2 billion charge in a single quarter after back-stopping many of its customers.

During the earnings call yesterday, CFO Colette Kress tried to address this: “We recognize the scale of this support, and we know some will call this circular financing. We see it differently,” she said. That struck me as a very interesting statement.

Still, it’s hard to ignore some of the language in the risk factors. Indeed, the very first risk factor is this, which is largely new phrasing based on a review of both the prior 10-Q and the 10-K.

Commitments, guarantees, and other commercial arrangements expose us to financial, counterparty and execution risks and may not provide anticipated benefits.
To support our operations and growth, we commit capital to secure supply and capacity, obtain cloud services, and lease data center capacity. These arrangements require substantial payments over many years. If future demand, our needs or plans differ from our expectations, we may be unable to reduce these commitments. Future demand may be affected by the ability of customers and partners, including those developing open models, to generate revenue and sustain investment in computing infrastructure.

The whole risk factor is 526 words and includes lots of new language on what happens if some of the customers that Nvidia is financing don’t perform as well as expected, or, even worse, go belly up. Back in the 10-K, the company also had a risk factor about counter-party risk. But that one was much more generic and was only 127 words. As a general rule of thumb, any time a company quadruples a risk factor, it’s usually worth paying closer attention to.

Digging in a bit more, I saw that the word “indebtedness” was used 5 times in the current Q, primarily in a new risk factor labeled “Our indebtedness may adversely affect our financial condition and cash flows from operations.” That’s also a significant change from the prior quarter and 10-K.

As I say all the time, there are no accidents in SEC filings. Corporate attorneys are paid lots of money to very carefully write these disclosures and that’s particularly true the bigger the company is. So it’s safe to assume that these risk factors were very carefully massaged and reviewed before they found their way into yesterday’s filing.