The Stock Market JUST Got Rugged by Nvidia.

Key Concepts

• Nvidia's 10-Q Filing: A quarterly report filed with the SEC that provides detailed financial information beyond the initial earnings press release.
• Inventory Management: The strategic buildup of raw materials, work-in-progress, and finished goods by companies.
• Prepaid Supply and Capacity Arrangements: Agreements where companies pay in advance for future supply or manufacturing capacity.
• Commitments and Contingencies: Financial obligations or potential liabilities disclosed in SEC filings.
• Partnership Investments: Collaborative financial arrangements between companies, such as the Nvidia-Microsoft investment in Anthropic.
• Guaranteed Lease Obligations: A company guaranteeing the lease payments of another entity in case of default.
• Cloud Spending Commitments: Long-term plans by companies to spend on cloud computing services.
• Accounts Receivable: Money owed to a company by its customers for goods or services delivered.
• OpenAI's Financials: Concerns surrounding the financial transparency and spending commitments of OpenAI.
• Auditor Independence: The potential conflict of interest when an auditor also has business relationships with the company being audited.
• Dot-com Bubble Analogy: A historical comparison to current market conditions, suggesting that market downturns can occur even when companies report strong earnings.

Nvidia's 10-Q Disclosures and Market Reaction

The NASDAQ experienced significant volatility, initially rising 2% and trending towards 617, but subsequently plunging by two percentage points, nearing negative territory for the day. This market skittishness is attributed to new financial disclosures from Nvidia in their 10-Q filing, which were not fully detailed in their initial earnings report. Nvidia's stock, which was approaching $200, also saw a downward rotation, and AMD experienced a decline of 2.32%.

Inventory Discrepancies

A key point of concern highlighted in the 10-Q filing relates to Nvidia's inventory levels. While CEO Jensen Huang had previously stated that increased inventory was due to building up components to avoid supply constraints, as seen during the Blackwell launch, the 10-Q revealed a more nuanced picture.

• Raw Materials: Increased by 23% from January to October.
• Work in Progress: Increased by a significant 156%.
• Finished Goods: Doubled from $3.2 billion to $6.8 billion.

The speaker questions why finished goods inventory has doubled if the company is purportedly "sold out." This discrepancy between the stated reason for inventory buildup (components) and the actual increase in finished goods is deemed "sus" and a "half-truth."

Furthermore, Nvidia's "prepaid supply and capacity arrangements" declined by 12%, from $1.7 billion to $1.5 billion. This decline, coupled with the surge in finished goods, is considered odd, especially when contrasted with the modest increase in raw materials.

Investment and Partnership Disclosures

The 10-Q also shed light on Nvidia's significant investment and partnership activities.

• Anthropic Investment: Nvidia entered into an agreement to invest up to $10 billion into Anthropic. This is part of a larger deal where Microsoft also invested, and Anthropic is expected to spend $30 billion on Microsoft Azure contracts utilizing Nvidia chips. The speaker notes that Nvidia is undertaking a larger portion of the investment ($10 billion) compared to Microsoft's undisclosed but implied smaller contribution.
• Guaranteed Lease Obligations: Nvidia entered into an agreement to guarantee a partner's facility lease obligations in the event of default. This allowed the partner (believed to be Coreweave) to secure financing for their data center. Coreweave reportedly put $470 million into escrow as part of this arrangement. This is described as an unusual but ongoing practice.
• Cloud Spending Commitments: Nvidia's disclosed cloud spending commitments have doubled. The company plans to spend:
  • $1 billion in 2026
  • $6 billion in 2027
  • $6 billion in 2028
  • $5 billion in 2029
  • $4 billion in 2030
  • $4 billion in 2031

This makes Nvidia one of the largest cloud customers, leading to the question of why the chip manufacturer is becoming such a significant consumer of cloud services, particularly those powered by its own chips. This is humorously referred to as a "giant circle" where money flows back to Nvidia.

Accounts Receivable Concerns

The 10-Q filing also revealed concerning trends in Nvidia's accounts receivable.

• January 26th: Customer #1 accounted for 17% of receivables, and Customer #2 accounted for 16%.
• Current Filing: The largest customers (Customers #1, #2, #3, and #4) now account for "big portions" of the receivables.

This indicates that the biggest customers are not paying as promptly, which is considered odd, especially given the overall increase in accounts receivable. The speaker speculates these customers could be Coreweave, Microsoft, or Oracle.

OpenAI's Financial Scrutiny

The concerns surrounding Nvidia's disclosures are amplified by ongoing scrutiny of OpenAI's financial practices.

• Spending Commitments: OpenAI has made substantial spending commitments, including a reported $300 billion over five years for compute power from Oracle. This has raised fears of "uncreditworthy borrowers" financing AI data centers.
• Auditor Concerns: The Financial Times has questioned OpenAI's auditor. While OpenAI is a private company, the accounting firm identified for its 2023 filing is Fontello, Dunfield, and Otake Limited Partners.
• Auditor Independence Conflict: A significant concern is the potential conflict of interest with major auditing firms. Ernst & Young and KPMG sell products using Microsoft Azure OpenAI tools. Deloitte uses OpenAI internally and may be OpenAI's auditor. PwC also sells OpenAI products. This raises questions about the independence of these auditors if they have business relationships with OpenAI.

Market Analogy and Conclusion

The speaker draws a parallel to the dot-com bubble, where Cisco continued to beat earnings expectations, yet the market eventually crashed due to unsustainable valuations and market sentiment. The current situation, with detailed disclosures emerging after initial earnings announcements, is creating similar unease.

The speaker's "alpha report" accurately predicted market movements, noting that the NASDAQ needed to hold 607, AMD needed to hold 232, and Nvidia needed to break 200 to maintain bullish trends. The failure to hold these key levels led to the subsequent market decline.

In conclusion, the detailed disclosures in Nvidia's 10-Q filing, particularly regarding inventory, investment structures, and customer payment patterns, have introduced significant uncertainty into the market. This, combined with concerns about OpenAI's financial transparency and auditor independence, is contributing to market volatility and a re-evaluation of AI-related valuations.