NVIDIA $117 Billion Trap

Behind Nvidia record breaking revenue there is a catastrophic threat. There is a dangerous dependence on the supply chain (annual report): purchase obligations to partners have risen nearly six times in a single year. This burden will come crashing down if any cooling of AI demand happens and it will be fatal for the company.

NVIDIA Purchase Obligations are Rising

NVIDIA purchase obligations are rising from $16.1 billion to $95.2 billion as of January 25, 2025, and yet again it’s a risk to Nvidia stability. This spike in costs is driven by requirements from TSMC - they manufacture Nvidia’s semiconductors. Due to the extreme complexity of new chips, the foundry required long term contracts and advance payments to reserve capacity.

Nvidia itself warns in its report that these obligations will continue to grow and become a core part of the supply system. So they are forced to place irrevocable orders long before real demand is clear, stripping the business of financial maneuverability.

There is a slowdown in capital turnover, key performance indicators - inventory holding periods and the cash conversion cycle, have not returned to normal. Plus cash is tied up in the factory for longer than it’s ever been.

Total supply obligations, ready inventory plus contracts for future purchases, have reached $117 billion. This amount is comparable to Nvidia’s annual operating cash flow, effectively erasing the company’s financial cushion and it’s a risk. If the profits drop even a little, they won't be able to pay for the huge amount of stock they've committed to buy, which could bankrupt the whole business.

Flashback to Cisco

Nvidia’s situation reminds a lot Cisco case. In 2000 and 2001 they expanded orders expecting 50% annual revenue growth, only to be forced to write off 40% of its inventory and obligations when IT spending slumped.

While Nvidia’s current margin is 71% and is higher than Cisco peak around 65%. You should take a closer look at the profits, which are polarized by shortages and price rallies., meaning if demand weakens, margins will probably revert to the mean very quickly.

There are also geopolitical risks export bans, sanctions, which we’ve been seeing too much lately, that will and are having their effect on NVIDIA.

All or Nothing

The market is shifting its perception of Nvidia - investors no longer see a stable tech giant. Now it’s an all or nothing gamble that depends entirely on whether the market is currently up or down. Unlike 2000, accumulated liabilities make stocks less predictable.

There are signs of a slowdown in OpenAI and Microsoft, they have begun revising their spending plans, and CEO Jensen Huang is spending more time promoting secondary business lines.

NVIDIA Circular Trades

Nvidia is using circular trades where they finance tech giants that then buy its equipment. Also customers inflate financial results by underestimating the depreciation of AI chips - six-year lifespan instead of only five.