NVDA is a good, cheap company with high price targets, but the speaker prefers other stocks due to concentration risk and shadow debt concerns.

Well, Nvidia just reported earnings and wow, there are some skeletons in the closet, but they're also actually pretty dang good. I think markets are discounting the concern that in the future we're going to see revenues really start kind of second derivative going negative, right?

The growth rate going down. Uh and and I think that's why the stock is cheap.

It trades for a six uh like a 0.67 PEG ratio, which suggests that the stock justifies today a price target well over $300. You could even go all the way up to potentially at the margins they run like an $800 stock.

But, the biggest thing weighing this down is not only the fact that a lot is based on that future growth rate for this company, but it's a $5 trillion company. It's really difficult to move a $5 trillion company when your revenues are concentrated in the hands of just three bastards.

First half revenues, 44% of this company's first half revenues came from just three customers.

And that's pretty much what will end up leading to more beatings and raises from Nvidia, which is what we got. We got a $108 billion forecast for Q3, which is bigger than expected.

As usual, things are bigger than expected when Nvidia looks at the numbers, but people are so used to it being bigger than expected that the stock doesn't even really move on anymore.

This is what happens when you're so big that you're $5 trillion big. The expectation was $105.15 billion for Q3. We got 108. So, that's good, but it's just like is that enough to really get people really excited again?

Maybe the stock will go up tomorrow now that this catalyst is over. I actually think that's kind of likely. But we'll see. But usually once you get the catalyst event, it's like a clearing event and people can be like Thank goodness. Now let's focus on the software bottom.

So what do we got over here? We have uh lower investment gains reducing the net income growth at Nvidia. This is understandable because they took massive investment gains uh in the last quarter.

We can actually calculate that by just subtracting this quarter's investment gains from last uh of the last 6 months. And we could see we had about 16.3 in gains last quarter, 7.7 this quarter from investments into companies like SpaceX or uh OpenAI or Anthropic or wherever they're investing in.

The big question to me is like how much more money are they throwing at other businesses? And they did show us that on the cash flow statement somewhere around here. Uh they ended up throwing stuff Okay, well, we'll find it in just a moment.

Where the heck is it? This is their income statement. We'll come right back to this in a moment. This is their balance sheet. And here we go. $42.4 billion in equity purchases purchases.

This is the circular financing part at Nvidia. 15 uh point eight billion last quarter. Uh sorry, 15.8 billion this quarter. 42.4 billion in total over the last two quarters. And they did sell 7.2.

Which means in total, they made circular financing purchases of somewhere around $35 billion.

That wasn't really the news today that many people really wanted to pay attention to. The bigger news today was that in the CFO commentary, they actually talked about circular leasing deals.

And this was quite a quite interesting. But basically, they signed these 15-year lease contracts where they're basically saying, "Hey, we're going to try to offload those leases to third parties."

I translate this and I say, "Yep, boys, we signed a 15-year lease so they can buy more of our GPUs and we promise we'll subordinate this toxic debt to a third-party private credit company."

That's my opinion. Obviously, I I don't know, but that's kind of how I read between the lines here.

It's also worth noting in the CFO commentary here that yes, indeed, this is the OpenAI facility. But in August, NVIDIA issued guarantees of $105 billion for for the OpenAI facility.

There are some limited exceptions and those guarantees do decline as OpenAI starts paying NVIDIA once this facility actually goes online. It is a 20-year lease to OpenAI, though.

So that $105 billion commitment remains a sag, like saggy balls. It remains a sag on the stock, right? But it's not just 105. You have to know that. It's $105 billion plus the potential expanded capacity.

The expanded capacity is right here. Listen to this. Uh over 20 years, we expect the site can support multiple infrastructure upgrade cycles. That doesn't just mean new chips, but it also means larger because they say right here, "We also have the option to provide credit support in phases for approximately 3.8 additional gigawatts."

Okay, well, 3.8 additional gigawatts on top of the 4.25 you already committed to. 4.25 was $105 billion dollars of guarantees. If you add 89% to that, you basically have a hundred ninety eight billion dollars of guarantees that you're giving open AI.

That's a lot of a guarantee. That doesn't show up on your balance sheet. That's an off balance sheet commitment.

And your balance sheet has weakened a little bit. It's still good. I got fifty seven billion dollars in cash. I got forty three billion dollars in bills. Okay? What does that get me?

Fifty seven minus forty three in bills. That means I got fourteen billion dollars in free cash for circular financing. Now in fairness, I got sixty three billion dollars coming in.

That brings me up to seventy seven billion dollars. Then I can subtract out the forty eight point three billion dollars of long term debt they have. Okay? So cash, receivables, less short term and long term debt leaves me at free cash of twenty eight point seven billion dollars.

Okay? But if I'm potentially guaranteeing a hundred five billion to a hundred ninety eight billion to open AI plus some other losers fifteen year leases, those debts don't show up here.

Uh at least as far as I can tell. You know, maybe some of the leases do, but I don't I certainly don't think the open AI ones do, right? That's problematic. So that's like shadow debt that does show up here.

Now in fairness again, they beat and raised. Okay? Q3 guide came in with a larger range than we expected. 108 plus or minus two percent as usual. Data center revenue beat really nicely.

We got eighty nine billion dollars. Great. That's fantastic. That beat by three point six five percent over the expectations. I got Q2 that beat by four point one percent over the expectations.

I got gross margin that came in at seventy five percent. This is still pricing power. They're still cranking money. They're still doing good. These people are printing money. They really are.

Their margin guide for the third quarter, not that great. Well, I should Let me put it this way. It's still great. It's just not as great as Q2. Q2 75%. We're now guiding 74%. So, a little bit of a decline.

They argue some of this is because of memory prices and they raised prices a little bit, but not enough to offset all of that.

Honestly, this report overall, like we know what the risks are, but it's pretty good, right? Yes, we've got shadow circular financing going on with leases. We got equity investments being made to other companies.

Yes, we know three percent of three customers made up 40% 4% of of your first half revenue. We know you guys are really exposed to the hyperscalers.

But part of it is probably just because Nvidia is such a big company. It's going to take some more effort, probably during market open now that the catalysts are clear and people can digest, people can go, "This is still a really good company.

It's still really freaking cheap. This should be a $300 stock."

Now, in fairness, I personally think other stocks are going to be able to outperform Nvidia from here. So, like just in full transparency, I've moved my bets from Nvidia. We've already talked to you.

This is old news. We already know that. But that's how I can maintain this belief that like I still think it's a good company. I still think there's money to be made. I still think it's undervalued.

I just think I can make more money somewhere else. Mostly because I think software is bottoming.

Uh and then of course, they are making more money they mentioned on their Blackwell systems for enterprise. Can't remember where they mentioned that, but somewhere they mentioned that.

I'm very excited about their Blackwell systems, the basically workspace systems. I think that is where the future of the AI spend is going, right here. Blackwell workstations, offsetting slower PC sales.

So, the upgrade cycle has really slowed for PCs, and I think that's why Nvidia is purposely trying to hide from that a little bit. I did also notice that their operating expenses on research and development did accelerate a little bit in this quarter compared to the last 6 months.

Not much, but a little bit. I'm wondering if that's because of spending on grow, grok, whatever, or open weight spending. I don't know.

They still do have pricing power though because we have a 2.13 x gross profit increase from last year. And uh pricing uh or revenue said uh what's what's it called? Um went 2.05.

So, in other words, you made more money on uh on that revenue growth that you had than you previously were making, which is good. That's bullish.

Still got revenue gains in here from their equities. Obviously, that goes to a down cycle or in a down cycle that turns to the downside, which is not great. We've got those shadow guarantees, not great.

And uh and then of course, we're spending more money on uh circular financing over here. We already know that. In fairness, almost $20 billion in buybacks. Uh however, they issued debt over here of about $25 billion.

Although, I think some of that I'm not sure if some of that was um a refinance because I see proceeds over here as well. So, I'm not sure about that.

Well, we'll definitely compare the balance sheet. It doesn't matter so much. We we understand roughly the cash position of the company. Uh and then if I look uh actually, that's all I got.

That's my take on Nvidia. Uh so, we'll cover some of the other companies as well, but uh this is pretty exciting for Nvidia. And honestly, overall, it's good. It's a cheap stock.

But, is it cheap because of concentration risk and the fear of how long can this giant company keep this going, especially with those shadow guarantees? Maybe.