A high-stakes gamble pays off: How NVIDIA’s bold inventory management strategies resulted in better CCC, FCF, CFO, and Liquidity metrics.

The global data center accelerator market is experiencing explosive growth, projected to increase from USD 110 billion in 2024 to a staggering USD 373 billion by 2029. This represents a compound annual growth rate (CAGR) of 28%, fueled by the rapid advancement of AI and related technologies.^[1] 

While these projections paint a rosy picture, they only scratch the surface of a deeper narrative—a tale of companies poised to reap substantial profits amid inherent risks and market vulnerabilities.

At the epicenter of this narrative is NVIDIA, a company that has not only anticipated the surge but has strategically positioned itself to dominate the market.

The meteoric rise of NVIDIA

Once a key player in Graphics Processing Units (GPUs), NVIDIA has transformed into a powerhouse in the AI accelerator space. Its revenue in 2024 increased by 126% from 2023 levels, achieving a five-year CAGR of 54%. Such growth has positioned NVIDIA as the second most valuable company globally, reportedly on the cusp of overtaking Apple.^[2]

The revenue increase stems from higher demand in the Data Center market, which accounted for 80% of total revenue in Q3 FY24^[3] .

But revenue growth is just one facet of NVIDIA’s success. The company’s financial acumen, particularly in working capital management and liquidity optimization, has been instrumental in its ascent.

A strategic bet on excess inventory

Anticipating excess demand in 2023: A calculated risk?

In the tech industry, where product life cycles are short and innovation happens at a break-neck speed, carrying high inventory levels is often seen as a liability. However, NVIDIA took a contrarian approach. Anticipating a surge in demand for AI accelerators, the company increased its inventory levels significantly—a move fraught with risk but one that ultimately paid off.

According to NVIDIA’s 2024 10-K report^[5]:

“In periods of growth, we may place non-cancellable inventory orders for certain product components in advance of our historical lead times, pay premiums, or provide deposits to secure future supply and capacity and may need to continue to do so.” 

This strategic decision led to an uptick in Days Inventory Outstanding (DIO), which increased from 86 days in 2022 to 122 days in 2023. While this initially strained the company’s Cash Conversion Cycle (CCC)—which rose to 132 days in 2023—the move positioned NVIDIA to meet the rapidly growing demand head-on.

Reaping the rewards in 2024: A shorter CCC & improved liquidity 

By 2024, NVIDIA’s CCC had decreased by 19 days, settling at 113 days. This improvement was largely due to a reduction in Days Sales Outstanding (DSO), which dropped to 41 days in 2024—16 days less than 2023 levels. 

NVIDIA’s 2024 10-K report stated “most of our (NVIDIA’s) sales are made on a purchase order basis”^[5]. Though purchase order (PO) is not based on credit sales, it can be used to facilitate credit sales.^[4]

The surge in Total Credit Sales (TCS)—up 263% from USD 24.5 billion in 2023 to USD 89 billion in 2024—played a pivotal role in decreasing DSO. While accounts receivable also grew, the impact of the increased TCS on DSO was more visible.

104% increase in Working Capital

Balancing act: Managing current assets & liabilities

Working capital management is the art of balancing current assets and liabilities to maintain short-term liquidity. NVIDIA excelled in this area, with its working capital increasing at a CAGR of 30% from 2020 to 2024. In 2024 alone, working capital surged by 104%, driven by a 92% increase in current assets compared to a 62% rise in current liabilities.

Strategic allocation of Current Assets

According to NVIDIA’s 2024 10K report, “Our (NVIDIA’s) primary sources of liquidity are our cash, cash equivalents, and marketable securities, and the cash generated by our operations”^[5].

A closer look at NVIDIA’s current assets in 2024: 

• Cash and Cash Equivalents, combined with Marketable Securities, made up 59% of total current assets.
• Marketable Securities alone comprised 72% of this total, with both cash and securities growing by 95% from 2023 levels.

Year (Values in USD Billion)	Current Assets	Cash and Cash Equivalent + Marketable Securities (A1)	Marketable securities	Marketable Securities as a percentage of A1
2024	44	25.984	18.704	72%
2023	23	13.296	9.907	75%
2022	29	21.208	19.218	91%
2021	16	11.561	10.714	93%

And, “We (NVIDIA) believe that we have sufficient liquidity to meet our operating requirements for at least the next twelve months, and for the foreseeable future, including our future supply obligations and $1.3 billion of debt repayment due in fiscal year 2025 and share purchases”.

By holding a significant portion of assets in liquid forms, NVIDIA ensured it had the flexibility to respond swiftly to market opportunities and uncertainties.

Outpacing competitors: NVIDIA’s superior Current Ratio

NVIDIA’s focus on liquidity is evident when comparing its current ratio—a measure of a company’s ability to cover short-term obligations—with that of its competitors:

• NVIDIA: 4.2
• AMD: 2.51
• Qualcomm: 2.39
• Intel: 1.59
• Broadcom: 1.04

A current ratio above “1” indicates that a company has more current assets than current liabilities. NVIDIA’s ratio of 4.2 not only showcases its strong liquidity position but also reflects its strategic preparedness to capitalize on the AI accelerator market’s growth.

The cascade effect: From CFO to FCF

Unprecedented growth in Cash Flows

The strategic management of working capital and current assets had a cascading positive effect on NVIDIA’s cash flows:

• Cash Flow from Operations (CFO): Increased by 398%, from USD 5.6 billion in 2023 to USD 28.1 billion in 2024.
• Free Cash Flow (FCF): Skyrocketed by 609%, from USD 4 billion in 2023 to USD 27 billion in 2024.

These figures represent NVIDIA’s ability to invest in research and development, pursue strategic acquisitions, reduce debt, and return value to shareholders.

Leveraging increased Net Income and Efficient Operations

The substantial increase in CFO was primarily due to higher net income and favorable changes in working capital, and its components.

The change in working capital at USD 17.2 billion, a key component of Cash Flow from Operations (CFO), accounted for 62% of total CFO in 2024.

Efficient operations, coupled with effective cash collection and inventory management, translated operational success into robust financial performance.

Foreseeable challenges: Major profit & loss risk factors

Risks related to the industry and markets

NVIDIA’s success depends on meeting industry needs and adapting to market changes. Key requirements include:

• Identifying market shifts and developing appropriate technologies
• Creating new products through R&D investment
• Launching competitive software and cloud solutions
• Maintaining strong ecosystem partnerships
• Meeting industry standards for safety and reliability
• Scaling infrastructure and operations effectively

Risks related to demand, supply and manufacturing

Inaccurate demand estimation can lead to supply-demand mismatches. NVIDIA relies on third-party manufacturers with long lead times and no guaranteed supply. Past estimation errors have resulted in both shortages and excess inventory, impacting NVIDIA’s financial performance.

NVIDIA maintains excess inventory and enters long-term supply commitments, though capacity securing remains challenging.

Several factors can cause demand estimation errors and affect revenue timing:

• Product development changes and market competition
• Economic conditions and government actions
• Technology shifts and customer requirements
• Data center capacity and energy availability
• Product transitions and new use cases
• Competitive dynamics and third-party decisions
• Cloud service demand and ecosystem changes
• Regulatory changes affecting gaming and exports

Risks related to global operating business

Adverse economic conditions may harm NVIDIA’s business. Economic uncertainties including recession, inflation, policy changes, market disruptions, and global developments could negatively impact operations through:

• Increased costs for components and supply chain, affecting the margins
• Higher operational expenses and market volatility reducing profitability
• Decreased product demand across our ecosystem
• Supply chain disruptions and delivery failures
• Challenges in business forecasting and decision-making
• Risk of key business partner insolvency
• Customer financial distress affecting market competition
• Financial market constraints and credit risks

Financial institution instability could create market-wide disruptions affecting payment obligations throughout our business network.

Conclusion: Integrating financial expansion with visionary treasury processes

Given the significant boost in sales and the associated risks, NVIDIA faces both opportunities and challenges ahead. While the company’s financial performance has been impressive, there is room for improvement in working capital management, particularly in reducing the Cash Conversion Cycle (CCC). 

The CCC in 2024 stands at 113 days, higher than the five-year average of 101 days. By optimizing the CCC, NVIDIA can enhance short-term liquidity, free up additional cash, and strengthen lagging financial indicators.

Competition is intensifying as well. ARM has recently launched its own AI chip to rival NVIDIA’s offerings, introducing operational and technological challenges that could impact NVIDIA’s financial health. Efficient working capital management and strategic liquidity planning will be crucial in maintaining a competitive edge.

To integrate this financial expansion with visionary treasury processes, NVIDIA needs to focus on:

• Enhancing Cash Management: Further optimizing the CCC to improve cash flow, providing more funds for investment activities.
• Risk Mitigation: Strengthening treasury processes to hedge against currency fluctuations, interest rate changes, and other financial risks.
• Strategic Investments: Utilizing increased liquidity to invest in research and development, strategic acquisitions, or other growth initiatives.

By focusing on improving working capital efficiency and integrating financial growth with strong treasury processes, NVIDIA can strengthen its financial health and maintain its leadership in the rapidly evolving AI accelerator market.

Source links:

1. Markets and Markets: Data center accelerator market size (link)
2. Reuters: Nvidia on cusp of overtaking Apple (link)
3. NVIDIA: NVIDIA quarterly revenue trends by market (link)
4. CFI: What is the purchase order? (link)
5. NVIDIA: 2024 10k report (link)