Nvidia’s Circular Revenue is Unattractive, and Unimportant
As we have said elsewhere, we don’t buy the “AI bubble” thesis. We especially don’t think of NVDA as being bubble priced. It may still be slightly undervalued. In a recent column, Light Reading’s International Editor, Ian Morris, makes an interesting point about potential circularity in some of NVIDIA Corp. (NASDAQ: NVDA)’s revenue.
Way back before some of you were born, there was this thing called the dot.com bubble. One of the forewarnings (which your humble servant missed entirely) was that some breakthrough Internet bandwidth providers such as Global Crossing were revealed to have been reporting as revenue what were actually capacity swaps with other bandwidth providers.
Sleazy. But it did not change the fundamental story of Global Crossing and other new big investors in fiber optic capacity. Those companies, like many American railroads in the late 19th century, suffered from only one flaw. They, and especially their capital expenditures, were ahead of their time.
Gazillions (inflation adjusted) of U.S. dollars were lost in the great railroad bubble. Yet in decades to come, every bit of track laid, every locomotive purchased, and more found rich and enduring markets. Global Crossing laid more fiber than it could finance in the moment; today every millimeter is employed.
Similarly, Mr. Morris critiques Nvidia’s recent “habit of making multibillion-dollar investments in customers or partners, behavior that smacks of old-fashioned vendor financing.” Particularly outrageous in Morris’s view “is the $100 billion that Nvidia is pouring into OpenAI, the Sam Altman-founded and loss-making company behind ChatGPT.” Though struggling to afford the massive racks of GPUs on which it depends, “it now has a ready source of cash from a generous donor to use. What Nvidia pays out of one pocket, it ultimately puts back in the other.”
“Circular” is not an unfair description of this arrangement.
To our eyes, even more blatant, though with much smaller numbers, is NVDA’s $1 billion investment in Nokia, making Nvidia the second-biggest shareholder in the Finnish telecom equipment vendor. Right on cue, Morris notes, Nokia’s strategy “has suddenly become all about Nvidia… which announced it would build a range of 5G and 6G network products on Nvidia’s GPUs, providing an ‘AI-RAN’ [radio access network] option for customers.”
And, as Morris pointed out, recent remarks by Nokia CEO Justin Hotard implied more to come. Hotard hinted “at the beginning of the end for custom silicon in Nokia’s mobile business with a ‘shift from proprietary to general-purpose hardware,’” i.e., NVDA’s GPUs.
This certainly looks potentially sleazy for all concerned. But other than the bad look, does this matter for NVDA’s stock price?
Here we part ways with Morris, who rolls out some tired bubble factoids in support of his broader claim that NVDA is “bubblish.” Citing NVDA’s 1,325% stock price growth over five years, he remarks this is “wildly out of kilter with non-technology stocks” such as Warren Buffett’s Berkshire Hathaway, up 120% over the same period. Walmart (NYSE: WMT) has only doubled.
Morris argues that “the disconnect between Nvidia and the real economy is even more glaring,” with global gross domestic product (GDP) growth hovering around a quite typical 3% rate. “Nobody,” he says “is doing fabulously well out of AI except the people directly involved in it.”
We’ve heard this before. Back in the late 1980s, eminent economists lamented the apparent failure of computers to boost productivity. As Nobelist Robert Solow famously remarked, “you can see the computer age everywhere but in the productivity statistics”.
The obvious response turned out to be the right one. It takes some time for the benefit of broadly applicable new technologies to show up in productivity. Management enthusiastically invests before it has figured out how to use the stuff. By the late 1990s, productivity growth had resurged powerfully, focused on industries that benefited most and earliest from computation, such as finance and retail (c.f. Walmart, Amazon).
We are about to see several decades of economic growth outpacing anything this country or the world has ever seen. The power of AI is, if anything, underappreciated. Don’t miss out. Buy America.