Everyone spent Wednesday night looking at Nvidia’s revenue. The more interesting line was further down the balance sheet. Total debt went from $8.5 billion in late January to $33.4 billion — roughly four times larger in six months, at a company that generated nearly $50 billion of free cash flow in a single recent quarter. That’s the clearest reading yet on Nvidia circular financing, and it isn’t a number the company can wave away.
“Circular financing” is the term Wall Street has settled on for an arrangement where the seller of a product also helps fund the buyer. Money goes out from the seller, comes back as a purchase order, and gets booked as revenue. Nothing about it is illegal or even unusual — carmakers have done it for a century. It just makes revenue a weaker signal, because you can no longer tell how much of the demand would exist without the seller’s own money propping it up.
Nvidia has ended up in that position along three separate paths, and it’s worth separating them because they carry different risks.
The first is direct backing of customers. Nvidia has guaranteed borrowing by companies that buy its chips, most visibly around large data center projects. On August 10 it went further, announcing a platform with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR to route more than $500 billion of outside capital toward buyers of its hardware. Nvidia doesn’t put up the loan; it stands behind part of the collateral value, which is enough to make lenders comfortable. I walked through the mechanics when the first of these deals appeared — why a chipmaker would guarantee its own customer’s debt.
The second path is broader than Nvidia and shows up across the AI supply chain: sellers handing buyers something of value to close the sale, whether that’s equity warrants, credit, or price concessions. Once one supplier does it, the others tend to follow, because a competitor offering financing is offering a lower effective price.
The third path is the one that showed up this week. Nvidia is now borrowing for itself. It raised $25 billion earlier this year, which at the time looked strange for a company sitting on an enormous cash pile — I wrote then about why a business that doesn’t need money still issues bonds. That borrowing has now landed on the balance sheet, and in the same quarter Nvidia returned about $26 billion to shareholders through buybacks and dividends. Borrowing roughly what you hand back is a choice, not a necessity, and it’s a choice that only makes sense while capital is cheap and margins are fat.
Which brings us to the thing actually worth watching. All of this — the guarantees, the outside capital, the debt — is affordable because Nvidia keeps about 75 cents of every sales dollar after production costs. That is what lets it absorb a bad outcome on a guarantee without flinching. And that number is now scheduled to fall: 74% next quarter, and somewhere between 71% and 72% the quarter after, as memory prices bite. Jensen Huang has rejected the circular-financing framing outright, and on demand he may well be right — the deals keep getting larger, and customers keep signing. But the argument for why the structure is safe rests on a margin, and margins are the one part of this that Nvidia has already told you is going down.
My take: Circular financing isn’t the risk — it’s the thing that only works while the margin holds, and the margin just got a schedule.
Not advice. Just how I see it.