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points by bagacrap 2 days ago | 0 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 2 days 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.
[–] skew-aberration 1 day ago
Yes, values are inherently speculative - the S&P is just measuring current market values though - something like the market consensus of the net present value (profits further in the future are treated as less valuable than profits today). As this consensus changes, the S&P goes up and down.
[–] 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 16 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...