Nvidia's blowout earnings contained some red flags
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Chipmaker Nvidia delivered another beat-and-raise in quarterly results on Wednesday evening, wowing investors with a higher-than-expected sales forecast that's sending the stock higher in Thursday trading. But the company's second-quarter fiscal 2027 earnings report contains a few numbers that should give investors pause. Higher accounts receivable From January to July, Nvidia reported a roughly 63% rise in net accounts receivable, from $38.5 billion to $63.1 billion. This shows a hefty increase in the number of orders the company has filled but hasn't been paid for yet. "It's worth keeping an eye on," Gil Luria, head of tech research at D.A. Davidson, told CNBC on Thursday. "We have to pay close attention, because the numbers are so big and they're making really big commitments way out into the future." Projections from investment banks show the increase ballooning over the next few years. Bank of America sees accounts receivable going from about $71 billion in January 2027 to $113 billion in 2028 and $147 billion in 2029. That would be a 107% increase over those two years. Morgan Stanley puts those numbers even higher. The bank thinks accounts receivable could total $171 billion in January 2029, up from an estimate of $78.6 billion in 2027 to mark an increase of 117%. Moreover, Nvidia noted in its quarterly filing that just "five direct customers" accounted for a total of 70% of its accounts receivable, indicating a tight roster of major incoming payment sources – mostly the cloud computing giants. In its second-quarter filing from last year, Nvidia said "three direct customers" accounted for a total of 56% of accounts receivable through the same period. More supply chain investments While its income backlog is growing, Nvidia's backstopping promises to customers and suppliers on the other side of its balance sheet are also getting bigger, amplifying a chorus of criticism over circular financing. Commitments more than doubled from $119 billion in the first quarter to $279 billion in the second, primarily due to memory chip component requirements, according to a Thursday note from Citi. NVDA 1M mountain NVDA 1 month Analysts for Goldman Sachs described these commitments as "substantial" on Wednesday, discussing them alongside the $500 billion financing arrangement Nvidia announced earlier this month along with a group of private equity behemoths. "[Nvidia] management noted its substantial financial commitments in support of customers, which total $366bn across supply/capacity commitments ($279bn, largely memory), cloud service agreements ($29bn), datacenter leases ($25bn), equity investments ($25bn), and CapEx ($5bn)," James Schneider at Goldman Sachs wrote in a Wednesday note to clients. A drop in free cash flow Amid the balance pressures, Nvidia's free cash flow also took a hit in the second quarter, dropping to $21 billion from $49 billion in the first quarter – way below estimates. "Free cash flow of $21.4 billion was well below the consensus expectation of ~$43 billion," William Stein at Truist Securities wrote in a Wednesday note. Stein attributed the drop to a lengthening backlog for accounts receivable as Nvidia has loosened payment terms for its many backstopping deals. "A/R DSO [accounts receivable days sales outstanding] went +15 days q/q as NVDA offered extended payment terms to investment grade customers," he wrote in the Wednesday note. Paul Meeks, head of tech research at Freedom Capital Markets, said he was paying attention to the lengthening terms. "Let's keep an eye on DSOs, but I'm viewing this jump as transitory," he said, attributing to an "aggressive ... ramp" in placements for its new Vera Rubin chip systems.