Nvidia quietly redefines free cash flow, is there something fishy in the $100 billion buyback plan?

A subtle change in wording by Nvidia is reshaping investors’ understanding of the chip giant’s financial health.

On September 28 this year, Nvidia announced an expansion of its share repurchase authorization by $150 billion to $235 billion, and quietly embedded a key statement in its announcement—"We will return excess free cash flow net of strategic uses to shareholders." According to The Wall Street Journal, this sentence essentially signals to investors that Nvidia’s external equity investments will also reduce the cash available for buybacks and dividends. This statement attracted little market attention, but the financial logic behind it is far-reaching.

If Nvidia’s strategic equity investments and cash spending related to equity incentives are included, its actual free cash flow for the first half of this fiscal year would plummet from the official figure of $69.9 billion to about $21.7 billion—a nearly 70% decrease. Meanwhile, Nvidia spent about $31 billion during the same period on additional buybacks beyond what was needed to maintain stable share capital, and its long-term debt increased by $24.9 billion to $32.4 billion, partially relying on borrowing to support the intensity of its buybacks. This combination has triggered doubts about the sustainability of its repurchase program.

"Net Strategic Uses": One sentence changes buyback logic

The core of Nvidia’s wording adjustment is to include strategic equity investments as a deduction from free cash flow.

Traditionally, free cash flow is calculated as the cash flow from operations minus capital expenditure (capex), serving as a proxy for the cash a business is free to use after maintaining operations. However, Nvidia’s capital expenditure now extends beyond plants and equipment to include equity investments in companies across the AI ecosystem.

Nvidia disclosed that it holds equity in 13 publicly listed and 229 private companies, covering data center construction, AI model development, energy supply, and hardware manufacturing, including notable AI enterprises such as OpenAI and Anthropic. Nvidia classifies these investments as "strategic" rather than "discretionary," believing they help accelerate the development of its computing platform and the broader AI market.

It’s worth noting that these investee companies are also Nvidia chip customers, creating a circular dynamic—Nvidia invests in them, and the companies then use these funds to buy Nvidia products. This structure has raised market concerns about the sustainability of the AI boom.

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

Nvidia has not officially changed the definition of free cash flow and still uses the traditional formula. But the real numbers are starkly different.

According to The Wall Street Journal’s analysis, in the first half of the fiscal year ended July 26 this year:

• Nvidia’s cash outflow for equity investments totaled $42.4 billion, with proceeds from disposals at $7.2 billion, resulting in a net outflow of $35.2 billion;

• If this net outflow is treated as a capital expenditure, Nvidia’s free cash flow drops from $69.9 billion to $34.7 billion;

• Additionally, cash spending related to employee equity incentives is also not included in the traditional free cash flow calculation. During the same period, cash withheld for employee stock vesting taxes reached $4.5 billion, and about $9 billion in buybacks was used to hedge against share dilution from equity incentives;

• After deducting cash outflows related to employee equity incentives and adding the net equity investment outflow, Nvidia’s adjusted free cash flow for the first half of the fiscal year is about $21.7 billion, roughly 69% lower than the official figure.

Meanwhile, Nvidia increased long-term debt by $24.9 billion during the same period, which in part explains how the company maintained a considerable scale of additional buybacks even as strategic investments and equity incentives absorbed large amounts of cash.

$235 Billion Repurchase Authorization: Can Wall Street Expectations Be Met?

Nvidia’s $235 billion buyback authorization is massive and requires sustained, strong cash flow to fulfill.

According to Visible Alpha’s compilation of Wall Street analyst forecast data, Nvidia’s average free cash flow projection for fiscal year 2028 (ending January 2028) exceeds $330 billion, theoretically sufficient to cover all repurchase authorizations and dividend payments.

However, Nvidia itself has already implicitly indicated through this wording change that significant ongoing capital injections into investee companies will still be needed going forward. If the scale of strategic equity investments stays elevated, the actual distributable cash flow—adjusted for these factors—will be far lower than projections using traditional measures, thus reducing the breathing room for actual buyback execution.

Information Disclosure: Nvidia Leads Peers, but Not Enough

Nvidia has taken the lead in improving information transparency.

In the last quarter, Nvidia revised its cash flow statement presentation to separate debt securities and equity securities under investing activities (its debt securities holdings are all U.S. Treasury or agency bonds), enabling investors to make such adjustments themselves.

In contrast, Microsoft, Amazon, and Google’s parent company Alphabet all report debt and equity investments together, making it difficult for investors to make similar breakdowns. The Wall Street Journal suggests other companies should follow Nvidia’s example.

Nevertheless, Nvidia’s improvements in disclosure are only the starting point. The real picture of free cash flow is much more complex than it appears on the surface. Investors need a higher degree of transparency in the cash flow statement to accurately assess the true financial status and buyback ability of the most important chip company in the AI era.