There are 4 illegitimate ways a company can grow revenue and maintain margins the way Nvidia has.
The first, subtle way, is by offering something similar to a sales rebate but booking it separately so it doesn't impact net revenue.
Perhaps you pay your customer when you ship the product, but in return for future services and not as a rebate. That would show up under the balance sheet item "Prepaid expenses and other current assets".
Then you have the option of booking revenue but not collecting cash. The corporate equivalent of buy now pay later.
The third method involves a bit more work. You need to take an equity stake in your customer and have them round trip it back to you as revenue.
Cash goes out, cash comes in, but the cash coming in commands a multiple while investors don't care about the cash going out.
How do you get a customer to agree to this transaction? Here's one way. No doubt there are others.
If this were happening, where to find the evidence?
As the below chart shows, NVDA . A q-o-q change in revenue moves in lockstep with change in accounts receivable and off-balance sheet liabilities.
In the last 17 quarters, NVDA 0.02%↑ grew revenue by $26.96 billion. Over the same period, accounts receivable and off-balance sheet liabilities grew by $49.96 billion.
To put it simply, it took adding $1.85 in AR+off-BS liabilities to increase revenue by $1. In the most recent quarter, it took a $2.75 increase in AR+OBS to generate the incremental dollar in revenue.
This shows that there is a natural limit to growing revenue by this means.
Everyone seems to be thinking $NVDA can reach a $5 trillion valuation. Let's say they need to grow revenue to $50 billion a quarter to get there. That's $20 billion more than last quarter, so perhaps another $37 billion in AR+OBS.
That would take their exposure up to $91 billion.
Good luck finding counterparties willing to accept the risk of being left high and dry when this blows up.
The stock has a greater chance of being indefinitely halted than reaching a market cap of $5 trillion.
It is simply impossible to blow a bubble that big even if all investors collectively lose their minds.
Question for my audience: what happens to expiring ITM options if the stock is under an indefinite regulatory halt?
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Good Trading!
Kashyap