Nvidia Circular Financing Controversy... Recovery Capability Matters More Than a Bubble [Click e-Stock]

Surging Receivables and Off-Balance Sheet Liability Concerns
KB Securities: "Risk Is Limited from an Investment and Recovery Perspective"
Key Issue: Cash Conversion Ability to Be Proven by FCF and ROIC

The controversy surrounding "circular financing" involving Nvidia is growing. There is suspicion that the company selling artificial intelligence (AI) chips is providing financing to its customers, and that these funds are then being used to purchase more Nvidia products—raising questions about whether the money driving revenue essentially originates from the seller itself. While sales are increasing, concerns are being raised about the quality of these results if the funds generating them come from Nvidia itself.

On September 3, KB Securities made this argument in a report that performed an in-depth analysis of the circular financing controversy at Nvidia. The starting point of these concerns is the second-quarter financials. Nvidia's revenue grew by 17.9% compared to the previous quarter, but accounts receivable surged by 54.9%. The Days Sales Outstanding (DSO) lengthened from around 46 days to 60 days, and the free cash flow (FCF) margin dropped from 59.5% to 22.2%. This means the speed at which revenue is being converted to cash is slowing down.

Nvidia explained that this is due to extended payment terms in large, multi-quarter contracts with customers such as OpenAI, CoreWeave, and NeoCloud. KB Securities also viewed this not as bad debt, but rather as a timing difference between revenue recognition and payment collection. The firm assessed that there is a high likelihood that DSO and FCF margin will revert to normal levels in the future.

Even greater concerns lie off the balance sheet. To support frontier AI labs, Nvidia provides direct investments, third-party capital financing, site and power procurement, and credit enhancements. Customer companies need to build AI data centers rapidly but struggle to secure large-scale, long-term funding based solely on their own credit. Nvidia fills this gap in the structure.

However, analysts say there is no need to view all reported figures as risk factors. According to Nvidia’s disclosures, the company's typical commitments amount to 366 billion dollars (approximately 498.9312 trillion KRW), with an additional 56 billion dollars in further commitments and guarantees. Of this, the exposure directly tied to circular financing is estimated to be around 81 billion dollars, which is the sum of 25 billion dollars in equity investments in customer companies plus 56 billion dollars of additional commitments and guarantees. The remainder more closely resembles procurement obligations that will translate into sales and production if underlying demand materializes.

Of course, concerns about off-balance sheet liabilities remain. Guarantees are contingent liabilities that do not appear directly as debts on financial statements. Actual borrowings remain with special purpose vehicles (SPVs) and may not be reflected directly in the financial statements of either Nvidia or AI labs. As a result, investors may find it hard to fully grasp the true leverage of the AI ecosystem.

Ultimately, the key issue is the company’s ability to recover these funds. KB Securities forecast that Nvidia’s cumulative FCF between 2026 and 2028 will reach approximately 960 billion dollars, close to 1 trillion dollars. This is more than twice the total of disclosed commitments, which stands at 422 billion dollars. The return on invested capital (ROIC) is also projected to remain at around 55% in 2028, maintaining a level five times higher than the cost of capital.

The reason Nvidia has adopted this structure is also clear. Every time a new data center is built, Nvidia’s share of the proceeds grows. In a 1-gigawatt (GW) data center, Nvidia’s revenue opportunity increases from 18 billion dollars for the Hopper generation, to 25 billion dollars for Grace Blackwell, and to 40 billion dollars for Vera Rubin.

Seyhwan Kim, a researcher at KB Securities, explained, "Nvidia CEO Jensen Huang has commented that even if a customer fails, Nvidia can resell or redeploy GPUs to other buyers, so the risk is low," adding, "For Nvidia, which is generating enormous cash flows, circular financing is essentially a form of advance investment that expands the overall market for its sales."

This content was produced with the assistance of AI translation services.