While Nvidia has become a superstar among tech stocks in recent years, the company is also suspected by some analysts of engaging in fraud. The graphic processing unit (GPU) manufacturer has yielded close to 3,400 percent return for shareholders in the past five years, giving them a market capitalization of over $3.34 trillion. Many remain optimistic of their future prospects because the company is a hardware supplier for the rapidly growing Artificial Intelligence industry, but some of their financial practices give some critics cause for alarm.

On the All-In podcast, tech billionaire Chamath Palihapitiya said of Nvidia, “the inquiry should be coming from the SEC about—is this real revenue?” He refers to the financial practice in question as “round-tripping revenue.”

Round-tripping revenue is a way for a company to artificially inflate their revenue by making sophisticated deals that ultimately offer no economic advantage for the company’s shareholders.

For example, imagine two kids that live on the same street. One of them has a lemonade stand, and the other sells cookies. The cookie kid buys $5 in lemonade every day, and the lemonade kid buys $5 in cookies every day. At the end of the week, both kids report their revenue to their parents ($35 each); this revenue is very misleading, because it was entirely derived from the same $5 being traded back and forth.

Popular financial commentator and COO of Synnax AI, @DarioCpx, posted an in-depth analysis of how Nvidia may be engaging in round-tripping revenue in a blog post in late May. He claims that there has been a 362 percent increase in “non-inventory purchase obligations,” or agreements to purchase something in the future, from the first quarter of 2023 to the first quarter of 2024. A large portion of these commitments are for cloud services. Nvidia currently receives cloud services from Amazon and Oracle, and also sells their products to both companies. It is not publicly disclosed what companies their future purchase obligations are with.

Dario also points out that Nvidia has a history of overstating income: in 2003 former CFO of Nvidia Christine Hoberg was charged with financial reporting fraud. She was accused of purposefully failing to record expenses relating to a deal with a supplier. Critics could say that if the future cloud service purchase obligations were a condition of the deal for Amazon and Oracle to purchase products from Nvidia, they should be reported as a part of a single deal. This could significantly change the accounting filings of Nvidia, ultimately lowering their profit margin.

Besides round-tripping revenue, they are also accused of inflating sales using clever client financing methods. This includes their dealings with Coreweave, a specialized cloud provider.

Coreweave is partly owned by Nvidia, and purchases Nvidia’s products as a major function of its core business. A month ago, Coreweave raised $7.5 billion in debt using Nvidia’s artificial intelligence chips that it had purchased as collateral on the loans. To expand their business, it seems likely that Coreweave will use much of these funds to buy more chips from Nvidia. Last year, Microsoft, also a buyer of Nvidia products, closed a cloud services deal with Coreweave potentially worth billions. This web of deals calls into question whether the sale of chips from Nvidia to Coreweave was at fair market value. The sale price of this transaction is not publicly disclosed.

On June 5th, the Federal Trade Commission (FTC) and Department of Justice (DOJ) announced an investigation into several tech companies including Nvidia. The investigation primarily aims to examine antitrust violations, not specifically regarding their financial filings. As Valuetainment previously reported, Nancy Pelosi (D-CA) and her husband have major financial investments in Nvidia.

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