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Vendor financing[1] has a long and successful history. Here's a good WSJ article from 2001 about the practice and risks[2], written after the DotCom crash in Ma

by nl 19d ago

Vendor financing[1] has a long and successful history. Here's a good WSJ article from 2001 about the practice and risks[2], written after the DotCom crash in March 2000. There is nothing illicit or illegal in anyway about what NVidia is doing. It's reasonable business practice, and people on HN are simply ignorant to think otherwise. NVidia is very aware of the risks it entails, but has the money to cover those risks. [1] https://en.wikipedia.org/wiki/Vendor_finance https://en.wikipedia.org/wiki/Vendor_finance [2] https://archive.is/mOIfg https://archive.is/mOIfg

stymaar 19d ago
> There is nothing illicit or illegal Which is exactly the point of the person you're responding to. What part of “but completely legal” isn't clear enough?
- JumpCrisscross 19d ago
  Enron was illegal but also a sham. The point is we have no evidence Nvidia's financing is a sham. It could be. And if it is, it's a huge problem. But the shammiest parts of what Enron did do not apply to Nvidia, which makes the comparison a bit like saying OP is Hannibal Lecter but legal while glossing over the fact that OP never murdered anyone but once drank red wine. (Also note that illegal != illicit.)
- nl 19d ago
  Their implication ("A la Enron", "they can buy good lawyers to keep it completely legal") that there is something illicit or wrong in what NVidia is doing. The OP clearly is implying that it should be illegal for some reason. This is wrong - not only is it nothing like Enron (!?) but it's a great way for both NVidia and the companies building on them to build what they want.
ElProlactin 19d ago
A big problem in discussions about Nvidia is that people can't distinguish between: 1. The equity investments Nvidia has made in its customers. 2. The guarantees/backstops it has extended to some of its customers. 3. Vendor financing. The vendor financing is the least interesting of the bunch. Nvidia has already disclosed that when it provides vendor financing, the average customer pays in less than 60 days. These are not long-term financing arrangements and virtually every big company sells on these type of terms (net-30, net-60, etc.). The equity investments and guarantees are where there is room for legitimate debate.
- JumpCrisscross 19d ago
  > equity investments and guarantees are where there is room for legitimate debate The guarantees dwarf the equity investments. If there is a shenanigan, it's going to be there. A problem: the line between the guarantees and traditional vendor financing is blurry–one could argue use commitments are no different from repurchase commitments.
  - ElProlactin 19d ago
    I should have been more precise with my use of "vendor financing" in saying "trade credit." I agree that the guarantees are where the risk is. First, under US GAAP accounting rules (ASC 606), these are absolutely not repurchase agreements. The customer takes title to the asset (the chips) and Nvidia does not have a contingent obligation to repurchase the asset. Providing a contingent guarantee to purchase services is not a repurchase under the accounting rules, but of course you can have legal accounting and still have a problem. As I've made public market investments in and traded in this space, I've done some math on the guarantees and what came out was this: relative to Nvidia's current earnings, the guarantees amount to approximately a quarter of a year's revenue at the guarantee cap. That's my own analysis and I'd encourage anyone who cares to run the numbers themselves. It's easy enough as Nvidia is publicly traded. The thing that differentiates Nvidia from previous vendor financing examples like Lucent in the 1990s/early 2000s is that its margins are huge. So what I see, based on the current numbers, is that in the really ugly scenario, Nvidia has to live with depressed earnings, no stock buybacks and a weaker (but still comparatively strong) balance sheet for a number of years. This is a stock problem, not a solvency issue. The wildcard is if Nvidia keeps extending big guarantees, or starts using debt to do so, to the point where the commitments are expanding faster than its cash flow. At that point, the risk obviously compounds accordingly.

by nl 19d ago

stymaar 19d ago

> There is nothing illicit or illegal Which is exactly the point of the person you're responding to. What part of “but completely legal” isn't clear enough?

JumpCrisscross 19d ago
Enron was illegal but also a sham. The point is we have no evidence Nvidia's financing is a sham. It could be. And if it is, it's a huge problem. But the shammiest parts of what Enron did do not apply to Nvidia, which makes the comparison a bit like saying OP is Hannibal Lecter but legal while glossing over the fact that OP never murdered anyone but once drank red wine. (Also note that illegal != illicit.)
nl 19d ago
Their implication ("A la Enron", "they can buy good lawyers to keep it completely legal") that there is something illicit or wrong in what NVidia is doing. The OP clearly is implying that it should be illegal for some reason. This is wrong - not only is it nothing like Enron (!?) but it's a great way for both NVidia and the companies building on them to build what they want.

ElProlactin 19d ago

A big problem in discussions about Nvidia is that people can't distinguish between: 1. The equity investments Nvidia has made in its customers. 2. The guarantees/backstops it has extended to some of its customers. 3. Vendor financing. The vendor financing is the least interesting of the bunch. Nvidia has already disclosed that when it provides vendor financing, the average customer pays in less than 60 days. These are not long-term financing arrangements and virtually every big company sells on these type of terms (net-30, net-60, etc.). The equity investments and guarantees are where there is room for legitimate debate.

JumpCrisscross 19d ago
> equity investments and guarantees are where there is room for legitimate debate The guarantees dwarf the equity investments. If there is a shenanigan, it's going to be there. A problem: the line between the guarantees and traditional vendor financing is blurry–one could argue use commitments are no different from repurchase commitments.
- ElProlactin 19d ago
  I should have been more precise with my use of "vendor financing" in saying "trade credit." I agree that the guarantees are where the risk is. First, under US GAAP accounting rules (ASC 606), these are absolutely not repurchase agreements. The customer takes title to the asset (the chips) and Nvidia does not have a contingent obligation to repurchase the asset. Providing a contingent guarantee to purchase services is not a repurchase under the accounting rules, but of course you can have legal accounting and still have a problem. As I've made public market investments in and traded in this space, I've done some math on the guarantees and what came out was this: relative to Nvidia's current earnings, the guarantees amount to approximately a quarter of a year's revenue at the guarantee cap. That's my own analysis and I'd encourage anyone who cares to run the numbers themselves. It's easy enough as Nvidia is publicly traded. The thing that differentiates Nvidia from previous vendor financing examples like Lucent in the 1990s/early 2000s is that its margins are huge. So what I see, based on the current numbers, is that in the really ugly scenario, Nvidia has to live with depressed earnings, no stock buybacks and a weaker (but still comparatively strong) balance sheet for a number of years. This is a stock problem, not a solvency issue. The wildcard is if Nvidia keeps extending big guarantees, or starts using debt to do so, to the point where the commitments are expanding faster than its cash flow. At that point, the risk obviously compounds accordingly.