The race to develop artificial intelligence is as much about creating ecosystems as it is about building chips and data centers. Acknowledging this requires investors to rethink a bedrock of financial analysis: how to measure a company's free cash flow.

While the term has no standard definition under accounting rules, free cash flow is typically calculated as cash flow from operating activities minus capital expenditures, or capex. Investors view it as a proxy for the discretionary cash a company has left over after reinvesting in its business, which it can use to reward shareholders or pay down debt.

The reality of today's AI juggernauts is that capex can take more than one form. It isn't just about adding physical property and equipment. Capex can entail making strategic equity investments, expanding the ecosystem that drives demand for a company's own products.

Those portfolio companies may be building data centers or developing new AI models, or they may be energy producers or hardware suppliers. Whether buying equity or spending directly, the capital investment remains tied up driving core growth and isn't available to hand back to shareholders or creditors.

That is the argument for factoring strategic investments into free cash flow. And it is one that Nvidia subtly endorsed last week, although few people noticed.

The upshot: Nvidia still plans to return gobs of cash to shareholders through buybacks and dividends, but only after taking into account its investment needs.

Nvidia also changed its cash-flow presentation last quarter to fully separate debt securities from equity securities in the section on investing activities. (The debt securities it held were all Treasurys or U.S. agency paper.) The change lets investors do the adjustments themselves, and it makes Nvidia an exception among the biggest chip makers and hyperscalers.

Microsoft, Amazon.com and Google parent Alphabet bundle debt and equity investments together on their cash-flow statements. That makes it difficult, if not impossible, for investors to make the kind of adjustments Nvidia is enabling. Other companies should follow its lead.

Nvidia's signal on this front came in a Sept. 28 presentation detailing a $150 billion increase to its share-buyback program, which brought its total authorization to $235 billion. "We are committed to sharing the company's success with shareholders and will return excess free cash flow net of strategic uses in the form of share repurchases and a gradually growing dividend," the chip maker said.

The crucial words were "net of strategic uses." Nvidia essentially put investors on notice that the cash it deploys into other companies also affects what's available for buybacks and dividends.

Nvidia said it had equity stakes in 13 public companies and 229 private companies across the AI ecosystem. It considers them all strategic investments that help accelerate its computing platform and the AI market.

In that sense, the equity stakes were essential, not discretionary. The cash Nvidia invests in portfolio companies like OpenAI and Anthropic also helps them buy Nvidia products, a circular dynamic that has raised concerns about the AI boom's sustainability.

To be clear, Nvidia hasn't changed its definition of free cash flow, and it still uses a traditional formula. But its equity investments have been substantial. For the first half of this fiscal year, cash outflows to buy equity investments were $42.4 billion, while proceeds from selling them were $7.2 billion, for a net $35.2 billion.

Over the same period, Nvidia reported free cash flow of $69.9 billion. Treating those investment activities like capex would have cut its free cash flow by half to $34.7 billion.

The traditional formula overstates free cash flow in another way, especially at large tech companies. It ignores cash costs directly tied to employee stock awards.

During the six months ended July 26, Nvidia paid $4.5 billion of cash withholding taxes when employee shares vested. Additionally, about $9 billion of its share buybacks during the period were used to offset share dilution from those same awards, according to a Wall Street Journal analysis.

These expenditures aren't included in net income or operating cash flow. They are classified as financing activities, so traditional free-cash-flow metrics ignore them. However, they are a key part of how companies pay their employees. Nvidia also received $515 million of proceeds related to employee stock plans.

All told, Nvidia's free cash flow would have been about $21.7 billion for the period if those cash flows were factored in along with the cash flows related to equity investments.

By comparison, Nvidia spent almost $31 billion on buybacks beyond what was needed just to keep its share count flat, while raising long-term debt by $24.9 billion to $32.4 billion. That debt raise helps explain how Nvidia funded discretionary buybacks after strategic investments and spending tied to stock-based pay absorbed so much cash.

Fulfilling its buyback authorization will require far more free cash than Nvidia generates today.

Wall Street analysts are predicting it will get there. For the January 2028 fiscal year, the average estimate for free cash flow tops $330 billion, according to data compiled by Visible Alpha. That would easily cover the full buyback authorization plus dividends.

But as Nvidia just flagged, it may need to keep pouring substantial cash into portfolio companies.

Free cash flow isn't all it appears to be, and investors need a lot more transparency on the cash-flow statement than they're getting now. Nvidia's recent changes should only be a start.