Nvidia’s ‘I’m Not Enron’ memo has people asking a lot of questions already answered by that memo

Christ. Fine. So over the weekend, a strange Substack post from what appears to be a CEO of a pet relocation company went very viral. This post — which to be clear, is bullshit — alleges that Nvidia is engaged in what “may become the largest accounting fraud in technology history.” That’s a load-bearing “may,” in the sense that there’s no credible reason to believe Nvidia is engaged in fraud at all.

Apparently this spooked Nvidia, which — as first reported by Barron’s — has sent a note to analysts clarifying that it is not, in fact, Enron. That note, which The Verge has seen, addresses the specific allegations in that Substack, as well as claims by famed short-seller Michael Burry that Nvidia’s accounting of stock-based compensation didn’t make sense. (According to Nvidia, Burry seems to have incorrectly added taxes on restricted stock units to get his numbers.)

Now, naturally, this caught my attention because I’ve recently used Enron as an analogy for what Nvidia is up to with the neocloud companies it funds:

“There is no neocloud that exists without [Nvidia CEO] Jensen [Huang],” says Saari. That makes neoclouds, in effect, extensions of Nvidia, he says. And none of them make money, so to expand, they must take on debt.

If we look at these as being, metaphorically, Nvidia’s special purpose vehicles, then it doesn’t really matter if the companies are any good or will survive in the long term. Their job is to boost Nvidia’s sales. Even OpenAI, also an Nvidia investment, kind of falls into this category — because the massive data center buildout that OpenAI wants the government to backstop sure involves an awful lot of Nvidia chips.

If you are old enough, or possessed of a certain kind of disposition, you may be thinking, Wait a minute, aren’t you describing Enron? And uh, in some sense, yes! Enron’s whole thing was special purpose vehicles with extremely speculative valuations that were used to take on debt, Luria notes. But Enron lied about what it was doing, and that’s fraud and illegal. (It also got up to other illegal stuff besides.) Nvidia’s relationship with CoreWeave is all happening in plain sight. So are all the relationships with the other neocloud companies. It kind of seems like the tech company version of the GameStop open pump-and-dump.

“It’s not good behavior, and it’s not healthy behavior,” Luria says. “But it’s legal. Any investor can see this. Many are just choosing not to.”

Since Nvidia has clarified, I’d like to add a clarification of my own: The problem is that Nvidia’s behavior is perfectly legal. In its note, Nvidia says it does not use special purpose entities to hide debt and inflate revenue. This is true! Every single neocloud Nvidia has invested in is its own company. Any debts those companies may have are on their own balance sheets. It’s not Nvidia’s debt. That’s one of the reasons why neoclouds are so convenient for Nvidia — as the company itself informs analysts, Nvidia doesn’t control those companies, and doesn’t provide the financing for them, either. They’re just very useful sin-eaters. In the case of CoreWeave, Nvidia is propping it up by investing in the company, including to make sure its IPO actually happened, and serving as a customer.

CoreWeave’s CEO has even bragged about the close relationship, saying, “I’m not bashful about reaching out” to Huang.

Personally, I think accusing Nvidia of accounting fraud is effectively taking one’s eye off the ball. It doesn’t have to commit fraud to have a very cozy arrangement with a whole network of companies that juice its earnings and may be inflating an AI bubble — all while its own executive sell shares to lock in their status as millionaires and billionaires. Nvidia has created seven new billionaires, in fact!

If and when the AI bubble pops, everything that inflated it will have been obvious the entire time. (That’s very in keeping with the times, isn’t it?) After all, I reported my CoreWeave story from the company’s public filings, following its “Risk Factors” section closely. Should the AI bubble burst, anything that accelerated Nvidia’s growth is likely to accelerate its losses; it will have to mark down its investments in the companies it propped up, for instance. Should those companies go under, that will mean a glut of Nvidia chips on the market as debt holders try to recoup their money, meaning Nvidia will effectively be competing with its own used product at fire-sale prices. It’s all very stupid, but as far as I can tell, not actually illegal.