NVIDIA Circular Vendor Financing | It doesn't matter until it does

I want to highlight that the content you should focus on is the interview of Anthony below on the The Knowledge Project Podcast. I have included both the podcast and YouTube formats for your pleasure.

The video companion at the top of the page is an AI NotebookLM generated summary with a 7 min runtime, if you do not have 93 minutes to listen to the entire interview.

We have all seen the diagram by Bloomberg on the current AI circle jerk.

(Update Oct 30 8:51am NY)

Everyone has heard of Nvidia’s circular transactions with OpenAI. At Veritas Investment Research, we have identified another 80-100 circular deals of Nvidia’s.

Our Special Situations Analyst Ben Butler, CFA, CPA Butler has done some great digging on Nvidia (see the snapshot below from his report to our clients a few days ago), continuing some of the work we’ve done on its circular transactions and accounting in the AI industry over the past three years. We concluded that the circularity of cash flows is now more material, more widespread, and much more conspicuous.

In my view, few investors are looking closely at NVDA’s accounting because it is all about growth. For the accountants out there, let’s just say that ASC606 and ASC323 may get in the way of growth expectations. If you know me, you know I’ve said this before - Nothing matters until it matters and when it matters, it matters a lot.

I won’t give too much away but my summary is simple. No one wants to be the party pooper while everyone is making money, and everyone’s making money. There are many components present that are very similar to Nortel and the networking expansion days of the dot com bubble. Anthony is not calling for a crash. He is simply pointing to the climate (windy conditions) we are in, and the flammable components (dry vegetation) present in the AI vendor financing merry go round.

It doesn’t matter until one day it might!

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The below was prepared by NotebookLM

Briefing Doc

The Coming Collapse? Insights from Forensic Accountant Anthony Scilipoti

Executive Summary

This document synthesizes the core insights and warnings from forensic accountant Anthony Scilipoti regarding the current state of equity markets, the AI boom, and the enduring principles of financial analysis. Scilipoti, who previously predicted the collapses of Nortel and Valiant Pharmaceuticals, identifies a period of “extreme euphoria” where investors dismiss fundamentals, echoing the dot-com bubble. The central argument is that while risk in the market is exceptionally high, it is being priced at historically low levels, evidenced by the tightest high-yield bond spreads and a benign VIX.

A key focus is the AI sector, where Scilipoti sees familiar warning signs of circular financing and investment structures reminiscent of the Nortel era. Companies like Nvidia and Microsoft are investing in their own customers (e.g., OpenAI, CoreWeave), creating an interconnected and potentially fragile ecosystem where sales growth is fueled by their own capital. These intricate relationships often lack full transparency, as individual transactions may not be material enough to warrant detailed disclosure for corporate giants.

Scilipoti is highly critical of the reliance on AI for financial analysis, framing it as a tool that accelerates information retrieval but cannot replace human judgment, experience, or the ability to form “mental models.” He warns that over-reliance on AI risks creating a generation of analysts who know the numbers but not what they mean.

To navigate this environment, he advocates a forensic accounting framework centered on identifying “flammable items”—potentially concerning data points—and waiting for a “spark” that turns them into genuine risks. This approach demands a deep, contextual understanding of a business, beginning with a thorough reading of financial statement footnotes to comprehend the accounting choices management has made. Ultimately, Scilipoti cautions that many of the forces at play—passive investing, retail investor influence, and flawed incentive structures—are creating a market vulnerable to a significant downturn when the prevailing narrative shifts.

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I. Current Market Conditions: A State of Euphoria

Scilipoti characterizes the current equity market as being in a state of “extreme euphoria,” drawing direct parallels to previous bubbles where narrative has superseded financial fundamentals.

Comparison to the Dot-Com Bubble

The prevailing sentiment that “the numbers don’t matter and the financial statements no longer matter because this is changing the world” is a direct echo of the dot-com era.

* Historical Precedent: Scilipoti recalls similar arguments made about companies like Nortel, Lucent, and Cisco, which were building the foundational infrastructure of the internet. While the internet did change the world, many of these foundational companies went bankrupt or were folded into others, and their stock valuations never recovered.

* The Narrative Trap: Investors are being sold a “dream” about the future potential of AI, which makes them willing to overlook weak or non-existent current fundamentals, such as negative free cash flow and valuations based on revenue multiples.

Indicators of Mispriced Risk

A central thesis is that market risk is highest when the cost of that risk is priced at its lowest.

* High-Yield Bond Spreads: The spread between the 10-year government bond and high-yield (non-investment grade) corporate bonds is near the tightest it has ever been. This indicates that investors are demanding very little extra compensation for lending to risky companies.

* Low Volatility: The VIX, a measure of S&P 500 volatility, is trading at a “benign level,” signaling a broad market expectation of stability.

* Scilipoti’s Conclusion: “The reason why I think we’re in a in a very high-risk situation is because the cost of the risk is priced very low and that’s when the risk is highest.”

The Economic Disconnect

There is a significant and concerning disconnect between all-time high market valuations and the financial health of the average consumer.

* Consumer Strain: Major consumer-facing companies are showing signs of stress. Walmart has warned on sales forecasts, Target is struggling, Lululemon’s sales are slowing, and Starbucks is reconsidering its pricing and business model.

* “Joe Sixpack” is Struggling: These data points suggest that the average consumer is facing financial pressure, which will ultimately impact corporate growth across the economy.

* A Contrarian Indicator: The fact that Warren Buffett has built up his largest-ever cash holding at Berkshire Hathaway is noted as a significant indicator that the world’s most successful investor sees a lack of value in the current market.

II. The AI Boom: Echoes of Past Bubbles

While acknowledging AI as a transformative technology, Scilipoti warns that the financial structures supporting the boom are exhibiting the same dangerous patterns seen 25 years ago.

Circular Investment and Revenue Streams

A key “flammable item” is the circular flow of capital, where industry leaders invest in their own suppliers and customers, creating an illusion of organic growth.

* The Microsoft/Nvidia/OpenAI Example:

* Microsoft and Nvidia are investors in OpenAI.

* OpenAI is a major customer of Microsoft’s cloud services and Nvidia’s chips.

* Essentially, capital provided by Microsoft and Nvidia is cycled back to them as revenue from OpenAI.

* The CoreWeave Example:

* CoreWeave is a data farm whose largest customer is Microsoft.

* Nvidia is CoreWeave’s primary chip supplier and is also a significant investor.

* Nvidia made a last-minute $250 million investment to ensure CoreWeave’s IPO financing could close. The deal was underwritten by JP Morgan, which had also provided a pre-IPO loan to CoreWeave.

* Nortel Parallels: This mirrors the dot-com era, when Nortel and Lucent would provide vendor financing and lines of credit to their customers. This propped up sales until the equity markets turned, at which point customers defaulted and the “wheels came off.”

The Problem of Disclosure and Accounting

Current accounting and disclosure rules may fail to capture the systemic risk building from these interconnected relationships.

* Materiality Thresholds: An investment like Nvidia’s in CoreWeave is immaterial to Nvidia’s massive balance sheet, so it does not trigger significant disclosure requirements. The risk is not in a single transaction but in the aggregate effect of potentially hundreds of similar deals across the sector.

* Accounting Manipulation: In the Nortel case, long-term receivables from customers were not classified as current assets or factored into operating cash flow, making liquidity and cash generation appear stronger than they were. After the collapse, accounting rules (FASB) were changed to correct this.

III. The Limitations of AI in Financial Analysis

Scilipoti argues that while AI is