Free cash flow sounds like the cleanest number in finance. It's the cash left after a company pays to run and grow itself. Jonathan Weil's Heard on the Street column this weekend shows how soft that number can be. Nvidia (NVDA) reported $69.9 billion of it for the first half of its fiscal year. Count the money it spent buying stakes in other AI companies. Add the cash costs of paying staff in stock. Weil gets about $21.7 billion.
The usual formula is operating cash flow minus capital spending. Accounting rules don't define the term. Weil's argument is that at the big AI companies, capital spending now comes in two forms. One is buildings and chips. The other is buying stakes in the companies that build data centers, write models or make power and hardware. Many of those companies then buy Nvidia products with the money. Nvidia said it holds stakes in 13 public companies and 229 private ones, and it calls every one strategic. In the first half it paid $42.4 billion for such stakes and took in $7.2 billion from sales, a net $35.2 billion. Count that as capital spending, Weil says, and the $69.9 billion becomes $34.7 billion. Half is gone.
Then there's stock pay. When employee shares vested in the six months through July 26, Nvidia paid $4.5 billion in cash for withholding taxes. About $9 billion of its buybacks did nothing but offset the dilution, the extra shares those awards created, by the Journal's analysis. The cash-flow statement files both under financing, a section the usual free-cash-flow math leaves out. Yet that money is part of how Nvidia pays its staff. Nvidia also took in $515 million from employee stock plans. Put it all together and Weil lands at about $21.7 billion for the half. Nvidia's buybacks over the same stretch ran almost $31 billion past the amount that merely held the share count steady. Long-term debt rose $24.9 billion, to $32.4 billion. In Weil's reading, that borrowing helps explain where the buyback money came from.
Four words in a presentation
The company said as much on Sept. 28. The occasion was a presentation on a $150 billion increase to its buyback program, now $235 billion in all. It promised to return excess free cash flow “net of strategic uses.” In Weil's reading, those four words put the portfolio ahead of the buyback. Nvidia also now lists its debt holdings and its equity stakes on separate lines of its cash-flow statement. That lets investors do this math themselves. Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) still lump the two together, and Weil wants them to follow.
Our read
Investments and risk (IN04). Two plain lessons. First, free cash flow has no official definition, so read the cash-flow statement and treat the press-release number as a claim. Second, a buyback authorization is a ceiling. The company can stop well short of it. Half of this period's headline cash went into stakes in customers and suppliers. In Weil's reading, part of the buyback was paid for with $24.9 billion of new debt. That doesn't make Nvidia a bad business. It makes the headline number a poor guide to what shareholders get back. Nvidia sits in 31 of our model books at weight. Nothing added, nothing trimmed. Microsoft, Alphabet and Amazon are held too, in 29, 28 and 19 books. Weil's complaint about their reporting applies when we read them.
If you own Nvidia through an index fund, you own this question in proportion. Our Oct. 1 piece said the $235 billion buyback plan is not a gift. This column shows the math behind that. If your plan leans on one company's buybacks or dividend, that's worth a look with the statement open. You read the fine print while the sun is still out.