Over the weekend, an alarming Substack post from who appears to be a CEO of a pet relocation company took social media by storm. This post claimed that Nvidia, the major player in chipset manufacturing, might be engrossed in what could potentially evolve into the largest accounting fraud in technology history. Let me clarify, it was predicated on a flimsy “may,” with no substantial evidence to support claims of an ongoing fraud at Nvidia.
As expected, this claim set rising alarms in the Nvidia camp, pushing the company to send out a note to analysts refuting these allegations and reassuring them they aren’t walking the path of Enron. This note explicitly addressed the allegations made in the viral Substack post, along with refutations to claims made by shockingly popular short-seller Michael Burry. Nvidia stated that Mr. Burry made errors in his calculations, inaccurately adding taxes on restricted stock units, thus leading to questionable numbers in his claims.
“If and when the AI bubble pops, everything that inflated it will have been obvious the entire time.”
This fiasco caught my attention primarily because I’ve recently compared Nvidia to Enron, drawing parallels with how Nvidia pours money into the neocloud companies it backs. An industry expert, Saari, observed that the existence of neoclouds heavily depends on Nvidia’s CEO, Jensen Huang. These companies do not generate profits; instead, they ride on borrowed capital to expand, thereby boosting Nvidia’s sales. Even the colossal data center setup that OpenAI, another Nvidia-funded venture, plans to implement would require ample Nvidia chips. The analogy with Enron seems befitting, as the latter was infamous for the overvalued special purpose vehicles it used to accumulate debt. However, the difference is that Nvidia’s dealings with companies like CoreWeave are utterly transparent and legal. This situation mirrors the open pump-and-dump scenario we witnessed with GameStop. Albeit legal, this behavior has raised concerns amongst industry analysts.
With Nvidia’s position crystal clear now, let me add my take on this: Nvidia’s practices, although ethically questionable, are entirely within the confines of the law. Nvidia has clarified that it does not use special purpose entities to hide debt and artificially inflate revenues. True enough, all the neoclouds Nvidia has invested in are independent companies. Their possible existing debt remains separate from Nvidia’s balance sheets. This setup works in favor of Nvidia, allowing them to steer clear of any financial accountability for these companies. In CoreWeave’s case, Nvidia’s investment, including involvement in making sure its IPO took off smoothly, has kept the company afloat, with Nvidia also serving as a customer.
The close relationship with Nvidia is something CoreWeave’s CEO, doesn’t shy away from. In fact, he has openly bragged about his collaboration with Huang.
Accusing Nvidia of accounting fraud may feel like a misguided effort. There’s no need for fraud when they have a beneficial network of companies that pumps earnings, possibly resulting in an inflated AI bubble. While their executives are becoming rich, the company is responsible for creating seven new billionaires already. Remember, if the AI bubble pops, all the mechanisms that led to the inflation will have been apparent all along. This mirrors the general state of affairs satirical yet true to our times!
To illustrate, I took the public filings of CoreWeave as an example. Just like Nvidia’s growth was accelerated, the burst of the AI bubble is likely to hasten its losses too. Investments in propped-up companies will have to be marked down. Furthermore, if these companies run aground, a surplus of Nvidia chips on the market will ultimately lead to Nvidia competing against its own used product available at significantly reduced prices. Though these series of events are ridiculous, they don’t appear to be illegal by any measure.
Original article: The Verge.
