> if companies reported dollars in and dollars out live to shareholders at least we would have an idea of how the company is doing in a general sense.
Goodhart's law is knocking on your door right now.
> if companies reported dollars in and dollars out live to shareholders at least we would have an idea of how the company is doing in a general sense.
Goodhart's law is knocking on your door right now.
Help me understand what you are saying here. For those that don't know this one is "a measure becomes a target, it ceases to be a good measure".
I'm not advocating for a single metric that can be gamed. A business is fundamentally about dollars in and dollars out. Maybe add receivables in there and a few other metrics from the P&L. I'm not trying to be prescriptive here on purely cash in and out.
I do think there is a low friction way that companies could report daily certain metrics that over time would give their shareholders a sense of the company's health and trajectory.
Dollars/receivables in and dollars/deliverables out is just a question of rate, unless I'm missing something.
If a 10 billion dollar company has a per-second dollar out/in rate of $1,000,000 due to actual organic business, a company with $2,000,000 can set up an LLC it buys and sells from, and legally 'swap' $1,000,000 a second back and forth in services "bought and sold" to mimic the appearance of the $10B company, to generate business interest/confidence/investment.
That's an extreme example, but the point is that real-time money flow has nothing to do with the actual 'health' of a company.
Extreme? Almost every AI related stock is investing in companies that then buy their product, efectively just giving stuff for free in exchange for better quarterly numbers.
And thus we keep talking about AI bubble and when it bursts, not if it bursts
... and how much of the stonk market and the actually legitimate economy it will take down with it.
My personal opinion? The bubble burst will make 2007ff look harmless in comparison.
I'm fairly certain you're describing fraud.
It's not actually fraud if there is some ostensible service they're performing. Business units within businesses 'pay' each other for 'services' all the time. Ditto for subsidiaries. Whether something is fraud might come down to intent alone.
The line between legal and illegal business transactions can be murky as hell.
For it to not be fraud you'd have to actually exchange services proportional to the line items. That isn't what was described. Falsifying line items to juice your numbers is fraud plain and simple.
The company I'm a director for licenses IP from my company. The company wouldn't exist without my IP (I'm one of the founders). Yet, I'm also a customer of the same. Dollars in/out, we're all kosher. This isn't fraud, it's just how companies work.
So long as the prices are fair and reasonable, sure. But that doesn't enable you to run up an arbitrarily large bill without either doing an arbitrary amount of actual work or committing fraud.
Yes. This is called “transfer pricing” and is tightly regulated in almost every country.
No, there is no proportionality aspect to the law. Once you’re in the support and software subscription realm, quite vast amount of “value” can be charged for with nothing being done.
Only if you ignore the concept of fair market value. There are going rates for these things. If what you said is true you could trivially launder money by selling a single copy of an arbitrarily expensive piece of software that did nothing more than print "hello world". In practice that's not how the law works. Regulators and judges aren't drooling idiots.
Sure, you could inflate your numbers a bit and likely get away with it. But it's still fraud (getting away with it doesn't make it not a crime) and you will likely be caught if you overdo it.
Yet we see it happening all the time with various AI deals.
How? "AI fincancing bad" is starting to seem like a new non sequitur meme. There's no imaginary thing being traded for indefensible valuations in AI dealings. Stock units at a certain valuation exchanged for an equivalant value in hardware is just a standard payment-in-kind transaction.
If the valuation turns out to change in the future, that's the hardware seller's risk.
It's not the same thing as buying a $20 million banana from a bahamian llc secretly owned by yourself, which is fraud.
I thought in that case nvidia was (approximately) purchasing stock in exchange for hardware? Which AFAIK is the entire point of stock - selling it to raise needed capital.
And if they actually constructed the deal that way, it would be fine. But by essentially creating a sham sale where they return the cash back to the customer in return for equity, Nvidia can book revenue and claim non-existent cash flow. The key is that the sale would not have happened without the corresponding equity deal. Nvidia had no discretion to use that cash any other way, so the "cash flow" in that case is illusory.
I don't see the issue. Goods valued at that amount changed hands. Why shouldn't bartering be booked as cash flow? The regulator is going to require you to value it for them regardless.
Wall Street places a value on sales, on the assumption that the sale means a customer had the money and the desire to buy the company's goods. In this case, OpenAI had the desire but not the money---Nvidia basically gave them the money to buy the product. So that "sale" should be devalued in the market. What if Nvidia paid more for the stock than the chips were worth? Now they're essentially paying people to buy their product and hiding the bribe in an equity deal by overvaluing the customer. The market sees the big growing sales number and buys Nvidia stock on the assumption that the growth is organic. It also sees Nvidia putting a big valuation on OpenAI, driving up that company's value at well. At some point, OpenAI ends up with more chips than it needs and Nvidia ends up holding a bunch of overvalued OpenAI stock instead of cash. And both stocks eventually crash as a result.
Does that clarify the situation?
Not really. Or rather I think we both agree and disagree. Dysfunction is always possible (that's why we have regulation) and if you want to make a case that what happened between OpenAI and Nvidia ought to be against the rules that could certainly make for an interesting discussion.
However it's not at all uncommon for large sales agreements to come with additional strings attached. On its face I don't see how this example is any different.
If my company wanted to barter with another company to exchange equity for infrastructure how would you expect that to be reported? Did this situation differ from that expectation?
> What if Nvidia paid more for the stock than the chips were worth?
I'm not sure. It's an interesting question. Were the unit prices (ie chip and stock quantities) made public?
>If my company wanted to barter with another company to exchange equity for infrastructure how would you expect that to be reported? Did this situation differ from that expectation?
As I mentioned, I would have no problem if that's what happened. But it isn't. Nvidia recorded the cash as ordinary income. They did NOT record the stock as income. Cash has a clear value; stock does not. You keep reducing the transaction to its effective outcome, which is not where the problem lies, as I outlined above.
I haven't reduced it rather I've asked you why you think it shouldn't be reduced.
So your objection is the way in which they did the accounting? This is not an area I'm particularly familiar with. Does the way they went about it fall outside of the norm for the US? Or is your objection a more general one regarding the US regulations on the matter?
I understand you object but I don't quite follow why. When it comes to manipulating the OpenAI valuation couldn't Nvidia have intentionally overpayed for the stock in cash? Wouldn't that have provided the exact same quantity of capital, the exact same investment, the exact same valuation?
Maybe it would be different if their GPUs weren't in such demand but they are. Even in such a case, they could have structured the transaction as a series of smaller independent ones. Same ultimate outcome.
>So your objection is the way in which they did the accounting?
Yes, the accounting is the problem. As I said from the outset, if they actually just traded chips for stock, it would not be an issue.
[dead]
That's what all these accounting rules exist to stop. No, you can't pretend that equipment breaking doesn't happen. No, you need to account for fixing the roof etc.
The difference between fraud and not fraud is if you can reach an agreement with auditors that it’s not fraud.
it's only fraud if somebody finds out
It's only fraud if one doesn't keep enough cash on hand to b̵u̵y̵ ̵a̵ ̵p̵a̵r̵d̵o̵n̵ make a campaign contribution.
I'm fairly certain he's describing the economy.
There are so many companies like this which are just moving money around rapidly in and out with little to no actual profit. Finance sector is easily gamed.
For example, anyone can become a billionaire; just start a company, issue 1 billion shares at slightly above $1 each, keep most of them for yourself; release just 10K shares to the market and then let traders trade those same shares back and forth among themselves at high frequency... With just over $10k each, they can keep moving 10k shares back and forth 10k times per day... They call it "High frequency trading."
There you have it; now you have a billion dollar company with a healthy trade volume of $100 million per day... Your stock is in-demand! And you just needed to find two traders with just $10k in the bank and a trading platform with low fees... Becoming a billionaire is not that difficult.
You can apply the same principle to revenue... Just increase the velocity of money in and out of your company and you can hit any financial target you want.
Doesn't mean it's a solid scheme but everyone likes the numbers they're seeing. Nobody is paying attention to actual buying power.
While I agree that "billionaire" is a stupid word that 99% of the population don't understand, but can be manipulated with, it is not true that investors only look at market cap. Lots of analysis goes into IPOs.
Correct. These kind of metrics invite fraud exactly because they are not rooted in reality. "Money circulation" is a bad metaphor. https://oleganza.com/all/money-does-not-circulate/
Isn’t the ‘circulation’ or ‘rate’ question a misinterpretation of the model of P&L analysis the OP was suggesting…?
When you realize companies can borrow against receivables and payables also....
But it eventually comes out, so while you can do it short-term, it's a terrible long-term strategy. Your stock will eventually crash and burn if you do too much of it.
All data that is externally visible about a public company will be consumed by traders and used to inform their market behavior.
Companies know this, thus every action they perform that affects an externally visible number is calculated both for the actual intent of the action, and how that action effects the number and the consequent market behavior.
This is why you see all sorts of moves that aren't strictly helpful for the business itself like being overly picky about which fiscal quarter certain expenses are taken in, etc. The more numbers about a company that are publicly visible, the more the company has to play this game.
Of course, visibility for traders is important for market efficiency too. But there is a balance there where you don't want to turn the functioning of a business too much into a perceived popularity game where it spends too much of its effort just making the numbers "look right" orthogonal to what's best for the business's functioning.
You can't just handwave assume a mechanism that games a real time system. Your 3rd paragraph explains how the current system adds another layer for gaming. Management can't predict what real time traders want to see, they can predict that less earnings this quarter are better than more earnings next. Your "balance" creates the problem in the first place.
Companies can already make press releases whenever they want yet non fraudulent ones fail to move the market in a predicable way. If someone is committing fraud I want to know about it instantly not in 3 or 6 months. This is just a gimme to Elon's scam empire from an organization he "has no respect for".
in other words, they know how data impacts stock price and do their best to game the data.
The data is how much money do you make in profit, companies try to game that already.