A subtle change in NVIDIA's wording is reshaping investors' understanding of the financial health of this chip giant.

On September 28th of this year, NVIDIA announced that it would expand the authorization for stock repurchases by $150 billion to $235 billion, and subtly included a key statement in the announcement: "We will repay shareholders with free cash flow that significantly exceeds our strategic needs ( excess free cash flow net of strategic uses )." According to The Wall Street Journal, this statement is essentially signaling to investors that NVIDIA's external equity investments will also reduce the cash available for repurchases and dividends. This statement did not attract much market attention, but the financial logic behind it has far-reaching implications.

If NVIDIA's strategic equity investments and cash expenditures related to equity incentives are included in the calculation, its actual free cash flow for the first half of this fiscal year would plummet from the official figure of $69.9 billion to approximately $21.7 billion – a reduction of nearly 70%. At the same time, NVIDIA spent about $31 billion during this period on additional share repurchases that exceeded what was necessary to maintain a constant share capital, and it also increased its long-term debt by $24.9 billion to $32.4 billion, partly relying on borrowing to support the intensity of these repurchases. This combination has raised doubts among outsiders about the sustainability of its repurchase efforts.

"Net Strategic Use": One Sentence Changes the Repurchase Logic

The core of NVIDIA's adjustment in this statement is to include strategic equity investments within the scope of deductions from free cash flow.

In the traditional sense, free cash flow is usually calculated by subtracting capital expenditures ( capex ) from operating cash flow, and it is considered an indicator of cash that a company can freely dispose of after maintaining its operations. However, NVIDIA's capital expenditures are no longer limited to factory equipment; they also extend to equity investments in companies within the AI ecosystem.

NVIDIA disclosed that as of now, the company holds equity in 13 listed companies and 229 private companies, covering areas such as data center construction, AI model development, energy supply, and hardware manufacturing. This includes well-known AI enterprises such as OpenAI and Anthropic. NVIDIA characterizes these investments as "strategic" rather than "optional," believing that they will help accelerate the development of its computing platforms and the overall AI market.

It is worth noting that these invested companies are also buyers of NVIDIA chips, creating a circular dynamic where NVIDIA provides funding to them, and in turn, these companies use that capital to purchase NVIDIA products. This circular structure has raised concerns in the market regarding the sustainability of the prosperity of AI.

Behind the numbers: How much is free cash flow overestimated?

NVIDIA has not officially revised the definition of free cash flow; the official formula is still in use. However, the gap in actual figures is startling.

According to an analysis by The Wall Street Journal, in the first half of the fiscal year ending July 26 this year:

• NVIDIA's cash outflow for equity investments amounted to $42.4 billion, while the proceeds from sales were $7.2 billion, resulting in a net outflow of $35.2 billion;
• If the aforementioned net outflow is treated as a capital expenditure, NVIDIA's free cash flow would be halved from $69.9 billion to $34.7 billion;
• In addition, cash expenditures related to employee stock incentives are also not included in the calculation of traditional free cash flow. During the same period, NVIDIA paid $4.5 billion in withholding taxes for employee stock grants, and an additional approximately $9 billion was spent on share repurchases to offset the dilution of equity caused by stock incentives;
• After deducting cash expenditures related to employee stock incentives, and adding in the net outflow of equity investments, NVIDIA's adjusted free cash flow for the first half of the fiscal year was approximately $21.7 billion, which represents a reduction of about 69% compared to the official figures.

At the same time, NVIDIA incurred an additional $24.9 billion in long-term debt during the same period, which to some extent explains how the company was able to maintain a considerable scale of additional share repurchases despite absorbing a large amount of cash through strategic investments and equity incentives.

235 billion yuan in repurchase authorization: Can Wall Street's expectations be fulfilled?

NVIDIA's $235 billion repurchase authorization is a substantial scale, and its fulfillment requires sustained strong cash flow support.

According to the forecast data compiled by Visible Alpha from Wall Street analysts, NVIDIA's average free cash flow for the fiscal year 2028 (ending in January 2028) is expected to exceed $330 billion, which is theoretically sufficient to cover all repurchase authorizations and dividend expenditures.

However, NVIDIA itself has hinted through adjustments in its wording that it will still need to continue to inject substantial funds into the invested companies in the future. If the scale of strategic equity investments remains high, the actual distributable cash flow after these adjustments will be far lower than the forecast figures under traditional metrics, and the actual room for implementing the buyback plan will also correspondingly narrow.

Information Disclosure: NVIDIA Leads the Industry, but Still Not Enough

In terms of information transparency, NVIDIA has taken the lead in making improvements.

Last quarter, NVIDIA adjusted the presentation of its cash flow statement, separating debt securities from equity securities and disclosing them separately under the investment activities category (the debt securities it holds are all U.S. Treasurys or institutional bonds), allowing investors to make the necessary adjustments on their own.

In contrast, Microsoft, Amazon, and Google's parent company Alphabet all present debt investments and equity investments together, making it difficult for investors to separate them. The Wall Street Journal believes that other companies should follow NVIDIA's example.

Nevertheless, NVIDIA's disclosed improvements are still just a starting point. The true nature of free cash flow is far more complex than it appears on the surface. Investors need a higher level of transparency provided by the cash flow statement in order to accurately assess the true financial condition and repurchase capability of this most important chip company of the AI era.