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Nvidia and Micron Make Up 34% of America's Earnings Boom(wsj.com)

175 points by JumpCrisscross 4 days ago | 47 comments

So someone correct me but I think this is sort of an accounting trick. When Microsoft buys an Nvidia GPU for $100, it will claim that it lasts 5 years, so writes down $20 in the expense column for this year. Meanwhile Nvidia takes all the profit at time of sale, $100. So for each GPU bought, SP500 logs $80 of profit, even though no money entered or left the SP500.

(Yes of course the GPU cost something to make, but the margins on these things are very high. The point is that revenue is immediate while capital expenses are amortized. And capital expenditure has gone way up lately.)

[–] JumpCrisscross 2 days ago

> When Microsoft buys an Nvidia GPU for $100, it will claim that it lasts 5 years, so writes down $20 in the expense column for this year. Meanwhile Nvidia takes all the profit at time of sale, $100

Nvidia would log $64 of profit against a $100 sale [1]. (The R&D cost to develop the chip have already been booked.)

> for each GPU bought, SP500 logs $80 of profit, even though no money entered or left the SP500

In your example the S&P would log ~$40 of earnings. (About because taxes.)

[1] https://www.macrotrends.net/stocks/charts/NVDA/nvidia/profit...

[–] bagacrap 2 days ago

Ok great, thanks for clarification. But still, on year 3 of the AI buildout, assuming the pace doesn't accelerate (it's already pretty fast!) then each GPU bought logs $0 profit since it's offset by amortization of the last two years. Compared to $40 of today, profit dropped by $40, meaning earnings contraction is around the corner...? Unless of course Microsoft manages to actually earn $20 or more from each GPU each year.

I suppose the uncertainty here would be the reason for financial market volatility.

[–] JumpCrisscross 2 days ago

> Compared to $40 of today, profit dropped by $40, meaning earnings contraction is around the corner...? Unless of course Microsoft manages to actually earn $20 or more from each GPU each year

Correct. If Microsoft fails to earn more profit from a capital asset, over said asset's useful life, than was paid for it, Microsoft's earnings would be reduced. Put simply, it would have made a bad investment. Presumably, that would affect whether Nvidia gets another order.

If you've ever wondered why subscription mania took hold over the last decade, you've backed into the answer.

(Note that Microsoft depreciates "servers and network equipment" on a straight-line basis over "two to six years" [1].)

[1] https://www.sec.gov/Archives/edgar/data/789019/0001193125263... page 61

[–] Frieren 2 days ago

> why subscription mania took hold over the last decade,

I don't see business to business subscriptions as a bad thing. It it a way of sharing risks. The horrifying thing is that they do that to consumers.

Consumers don't have the legal teams to analize such contracts. Consumers do not have people dedicated to evaluate prices and change providers (Even for companies is costly, so individuals get stuck in products they do not use anymore). Subscriptions change prices and conditions at will, what makes it impossible for a normal consumer to follow up on everything that changes over time.

The fact that even when you theoretically buy, like a phone or even a TV, also becomes a subscription because the software it runs needs updates.

Subscription models that may make sense for corporations are killing the working class ability to own things or even choose which business they want to buy from. It is just about capturing customers and not letting them leave as prices are pushed up.

[–] protocolture 2 days ago

>Ok great, thanks for clarification. But still, on year 3 of the AI buildout, assuming the pace doesn't accelerate (it's already pretty fast!) then each GPU bought logs $0 profit since it's offset by amortization of the last two years.

Probably worth noting that Azure has had GPU resources for a while, I think it was already a profitable line for them, and since people have been chasing GPU compute on cloud platforms it can be difficult in some regions getting a reservation. Microsoft is probably looking at AI as Another profitable use case for our assets, let's expand it rather than a greenfields GPU buildout from zero. And where capacity doesn't get used by AI their customers can use it for other stuff across most not all SKUs

[–] skew-aberration 2 days ago

What's wrong with this though? Value was created (a physical GPU), so assets go up.

Different people/orgs get a different slice of that value.

[–] bagacrap 20 hours ago

I would say actual value is created when the GPU is used to do something useful, like design a better bridge, or whatever, not when the GPU is bought or produced.

The accounting trick pulls forward the point of value creation, and relies on faith, if you assume "value" is supposed to be measured by "earnings".

Ultimately, investors can look at these earnings and decide to pay whatever they are willing to pay for equity in the companies. No one is forcing you to buy SP500 (except if you're part of a defined benefits pension plan). My point is that casual observers should not take earnings growth as proof that the economy is heading in the right direction. There are lies, damn lies, and statistics. And accounting. Msft seems to be pretty good at gaming the accounting fwiw! Financial engineering.

[–] skew-aberration 11 hours ago

Yes, it is speculative and subjective - but so is all value. You can't factor that out, because it is inherent to every transaction that humans ever make. We make decisions based on our own valuations of expected future outcomes.

Even the value of the bridge is not realized until people cross it. It takes decades for such investments to break even, if they ever do - far longer than a GPU (which probably costs less than a mere boardwalk across a ditch).

Accountants are doing exactly what they should - every asset and liability is broken down by its market value (speculative) which investors then use to inform their speculation about the value of the company. If they think the company is more valuable than the current market price, they buy more stock. If you think the market value of a GPU is too high, don't buy it.

The market can be (and frequently is) wrong - but it's not an accountant's job to predict that.

[–] sandeepkd 2 days ago

There is a cost to produce something based on raw materials and then the possible price you can charge from the customer based on demand and supply.

The term Value is pretty vague here. Its more of a perceived value so its hard to put a number against it, there is no direct way to translate it to something more concrete.

May be bit orthogonal, one way I can think of it is to map to physical needs like clothing, housing, food and medicine?

[–] skew-aberration 2 days ago

It is really only the perceived value which matters to a business - that's the value at which you can sell or replace your asset on the market. Offers above that price, you sell (and replace if needed). Offers below that price, you don't.

If it costs more to produce (and sell) the asset than you can sell it for, you're losing money and assets go down. If it costs the same, then in this example the net change in S&P assets would be zero.

[–] parineum 2 days ago

> there is no direct way to translate it to something more concrete.

There's an incredibly easy way to do that, sell it.

If Nvidia takes $20 of parts and sells it for $100, they created $80 of value. If we had VAT, that's what would be taxed (minus things like r and d but, for simplicity...).

[–] strobe 1 day ago

that definitely $80 of value for Nvidia added but does it really added something to whole system? if some physical goods moved from one company to another with generation of VAT, does it really add up to economy as whole or just one seller made bad decision and loosed some $, other gained few $ but overall balance of value just still same.

[–] parineum 1 day ago

> does it really add up to economy as whole

Yes.

I don't want to pick on you but this is a major pet peeve of mine. A lot of people view the economy as a fixed size of value. As a result, when someone is a millionaire, they consider that million dollars to be something extracted from others. That's a very Feudal view of economics. What's usually the case is that millionaire add a million dollars of value by creating a more valuable product from raw materials.

This example is an easy example. Before Nvidia, there was just a pile of silicon and copper worth $20. It doesn't take $80 to turn that thing into something that is worth $100. The value within the economy increased.

Most of economic activity is growth. There is economic activity that isn't growth, which is what rent-seeking is.

[–] strobe 1 day ago

I think it exactly what I'm trying to say. Current state is that GPUs that Nvidia produced are not really in use, they mostly stored in warehouses as is not enough power for them so while they has 'potential future value' it's not proven to be created as lot could happen, unlikely natural disaster or they just could loose in value as demand drops or competitor will came with cheaper option.

[–] whatshisface 2 days ago

The value of a physical GPU is yet to be determined, and is hard to reverse engineer from these figures.

[–] downrightmike 2 days ago

Almost, the depreciation is 2 years, but for some reason they wrote it up like 5 for now. But anyone buy nvdia chips is already maxxed out on debt for the next 5 years and the new chips are here shortly. What happens to those 100's of billions in chips?? They get written off. We're already seeing them in cars. There is no shortage except on the scrutiny of the whole securities thing.

[–] downrightmike 15 hours ago

Looks like they have bumped it up to 6 years, which completely turns around from completely unprofitable quarters to profitable

[–] shoo 2 days ago

Is it conceivable that Microsoft has some way to use said GPU to generate additional revenue and operating profits?

See the earlier discussion about DeepSeek's revenue: https://news.ycombinator.com/item?id=50163494

[–] madaxe_again 2 days ago

When BMW sell you a car, and you buy it on finance (hire-purchase etc.) where they are lending you the money to buy it, they recognise the entire sale value of the car there and then. They even pay tax on the cash they don’t yet have in their pocket.

Meanwhile, you amortise it over years.

For some reason, nobody argues that this isn’t a real sale of a real car.

If it’s all just circular financing, then tax day will be the reveal, as there will simply be no money to pay the corporation tax on the profits.

[–] RunSet 1 day ago

> Seven huge corporations recently announced that in 2024 they were allowed to collectively keep $1.4 billion in tax breaks from previous years that they had publicly admitted would likely be found illegal if investigated – all because the tax authorities were unable to identify and disallow them before the statute of limitations ran out.

https://itep.org/what-corporations-have-to-gain-from-the-gut...

[–] Good4boothee 1 day ago

I just want to remind everyone that SK Hynix was once able, on its own, to bring average yearly growth for entire South Korea economy down to zero.

[–] foota 2 days ago

In theory if people are giving all of the money to Nvidia, then it's because they find it valuable (in this case companies purchasing GPUs) so even if the GPUs weren't so expensive in theory there would still be economic value derived from the transactions.

[–] Honali 2 days ago

Sure, but willingness to pay isn't quite the same as actually getting a good return

[–] daveguy 2 days ago

In theory.

[–] westurner 1 day ago

And defense ETFs?

Is there actual growth in new manufacturing starts? Wasn't that the metric that they claimed to be intending to optimize for?

[–] cyanydeez 3 days ago

Aka, inflation.

[–] christophilus 2 days ago

More like a temporary market fluctuation or maybe bubble.

[–] georgemcbay 2 days ago

> More like a temporary market fluctuation or maybe bubble.

A bubble that is obscuring that most of the economy is pretty weak.

It increasingly looks like everything is getting K-shaped. Not just the income of labor, but the earnings of corporations.

[–] msteffen 2 days ago

I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors, such as healthcare, construction). Basically, when software or AI is super lucrative,

1. students go into new lucrative thing

2. supply of doctors goes down

3. doctor wages go up

4. hospital margins go down

5. Hospitals raise their prices to stay in business

6. Wealthy engineers are able to afford higher prices

7. Services that are transitively consumed by the high-productivity sector stabilize at a higher price. Services not transitively consumed by the high-productivity sector go out of business.

- I remember visiting a developing country about 15 years ago and seeing people getting paid to stand there and hold a rope, because I guess their time was cheaper than cones, which I think is the inverse of this.

- I also think that, in the limit, society consists of a handful of economically viable occupations and infinite cheap stuff. Nothing else is worth the prices that a seller would have to charge to afford employees.

- I also think that we’re entering a stabilization phase.

[–] opo 2 days ago

>I think this is what Baumol’s cost disease is about (productivity growth on one sector drives up labor costs and ultimately prices in other sectors,

This is a clear and accurate description, but your explanation of the underlying reasons isn't really as clear.

>1. students go into new lucrative thing

Part of the Baumol effect is that the share of total employment in the sectors with high productivity growth decreases, while that of low productivity sector increases. This is sort of the opposite of what you are saying.

>2. supply of doctors goes down

The Baumol effect by itself has no effect on the number of Doctors. There are always more qualified people who want to be Doctors than are allowed to be Doctors for a great number of reasons. It isn't because not enough people want to be Doctors.

3, 4, 5

Yes those look like the Baumol effect.

6, 7

Not really what the Baumol effect is talking about.

Baumol illustrated his point in a simple manner. In the 1700's a string quartet required four musicians, and today a string quartet still requires four musicians (no productivity gain). However, those musicians today expect 21st-century salaries to match the rest of the economy, making the cost of hiring a quartet vastly more expensive relative to goods like mass-produced items.

The wikipedia entry looks pretty well done:

https://en.wikipedia.org/wiki/Baumol_effect#cite_note-:11-4

[–] msteffen 2 days ago

TIL! I’m entirely inexpert in the topic and posted as a curious layperson.

That said, some of what’s in the article only makes sense to me in the context of a system that’s at least somewhat like what I tried to describe. Maybe you can enlighten me?

> This effect is an example of cross elasticity of demand.

Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor? Eg land, healthcare, unskilled labor (as an input, in the case of skilled labor as the output—doctors and engineers in my comment)?

In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.

So people are either leaving the profession or raising their prices, and either firms pay, high-wage-earners pay, or they get no customers and again get other jobs (like the rope-holders). Is that not the effect?

[–] opo 2 days ago

>...Is the cross-elasticity of demand here not referring specifically to the cross-elasticity of different forms of labor, which exists due to the many common inputs of different forms of labor?

This isn't necessary to explain Baumol cost disease. Different kinds of workers may also be substitutes for one another, or complements. However, the quartet doesn't need to share a particular set of inputs with car manufacturing for Baumol's mechanism to operate.

>...In the case of a quartet, if musicians charged what they did in 1700, they would quickly become homeless, and then quickly get other jobs.

Yes. Baumol cost disease is a way to explain the upward pressure on the cost of lower productivity labor-intensive services. It isn't an economic law, it is a tendency. It doesn't guarantee that every business will be able to pass those costs on to customers, or that every business will survive or that every worker will receive the same wage increase, etc.

[–] lultimouomo 2 days ago

The Wikipedia entry actually says 2, or something very similar:

> The rise of wages in jobs without productivity gains results from the need to compete for workers with jobs that have experienced productivity gains and so can naturally pay higher wages.

Supply of doctors doesn't go down only because hospital raise wages to compete with the new lucrative thing. There are plenty of people that want to become doctors, but only so many of them are people that you want to be doctors, and if you don't pay enough they'll do the lucrative thing.

[–] opo 2 days ago

Doctors are just not a good example to use though as an example here. Healthcare costs have risen as one would expect due to Baumol’s cost disease, but Dr salaries have generally not gone up as much as one would have expected. Medicine is such a tightly controlled market that lots of things are distorted - Medicare decides how much they will compensate, etc. Many more qualified people would like to become Drs but are not allowed too (From 1980 to 2005, the number of medical students stayed flat despite population increases - this is slowly been increasing the last 20 years along with the number of residency positions.)

[–] Rury 2 days ago

Yeah, and it's similar reasoning as to why gentrification tends to happen when the wealthy move into an area, and why prices for things typically decrease when the wealthy leave.

[–] WalterBright 2 days ago

When people leave, the prices of things they were buying goes down due to the Law of Supply and Demand.

[–] samudrijan 2 days ago

Hospitals and health insurers aren’t really operating in a free market.

[–] warkdarrior 2 days ago

The argument works with any service business that is shared by high income and low income earners: restaurants, transportation, clothing, housing, groceries, etc.

[–] spwa4 1 day ago

So is the orthodox economist solution: government, the biggest employer and biggest debtor in the whole economy (by far) starts printing money to pay its employees more, thereby using inflation to redivide the debt to the government, and then to its employees which then conveniently also forces every employer to increase pay.

Which means the productive economy gets a greater share of the wealth, by taking it from the rent-seeking part, whatever that may be.

Of course, billionnaires hate this, since their wealth is pretty much some percentage of that debt.

But pensions go down as well, because that's how the system was redesigned by large banks after the last time governments really did this. This was done so it would be as unpopular as possible. Of course, the whole "so what do we do instead" was left unanswered ...

And instead banks decided to lend the government money (QE, covid, ...) which is why governments are now in trouble. In the US, despite what you may have heard, just lending more to the government is quite possible in the US (because the government would still get substantial income for a substantial amount of time by lending more). However for a number of EU countries (reporting focuses on France but if you allow me to be 5% inaccurate let's just summarize that all EU countries except Germany cannot lend more as it would "snowball" in 2029 or 2030, which is within the next government mandate for those countries)

[–] UncleOxidant 2 days ago

> I also think that we’re entering a stabilization phase.

Why do you think that? Everything you wrote prior to that seemed to indicate further destabilization.

[–] UncleOxidant 2 days ago

inflation of a bubble.

[–] parineum 2 days ago

If it was inflation it be all stocks.

[–] JumpCrisscross 2 days ago

Inflation isn't uniform across an economy.

It also preferentially benefits as a function of margin. If Nvidia's prices double, it logs two thirds of that as earnings. For Kroger it turns into like a penny of extra profit for every dollar of price rises.