NVIDIA is working on a fresh round of AI deals worth more than $750 billion, strengthening its role as a financer of the infrastructure and companies driving the AI revolution.
- Last week, NVIDIA and South Korea’s SK Group unveiled a more than $500 billion AI initiative spanning large-scale AI data centres and next-generation memory, NVIDIA said.
- The company is also in talks to provide up to $250 billion in financing to help OpenAI lease computing power from a US data centre project in what would be among the chipmaker’s biggest financing deals with a customer.
- NVIDIA is also in discussions to finance $350 billion of OpenAI’s purchases of its chips for the US project, according to a person familiar with the matter, Bloomberg reported.
- And on Monday, the chipmaker announced a “substantial” investment in Safe Superintelligence, founded by former OpenAI chief scientist Ilya Sutskever. People familiar with the matter said Nvidia committed $5 billion to the startup.
From Goldman Sachs to ‘Big Short’ investor Michael Burry, several experts have warned about the circular nature of these deals, i.e. Nvidia invests in or finances companies and projects that ultimately buy its own chips. They fear that such a pattern could artificially boost demand, making AI demand look stronger than it is. And, the most uncomfortable question right now is: How big a risk does this pose to investors?
Regarding the term ‘circular financing,’ one clarification is needed, Viram Shah, Founder & CEO, Vested Finance, says. Nvidia buying stakes in AI companies is normal investing. If the bet fails, Nvidia loses its investment. Nothing more.
But this time around, the concern is different, Shah asserts. “Nvidia is reportedly agreeing to guarantee someone else’s loan. That’s where the real risk sits.”
OpenAI isn’t profitable, so borrowing on its own could be expensive. But Nvidia’s backing makes the loan cheaper. So, it’s like a father co-signing his son’s home loan. The bank starts looking at the father’s financial strength, not just the son’s income.
Also, the scale is the striking part. Nvidia’s own filings show about $3.5 billion in guarantees today. The figure being discussed for this project is $250 billion. That’s not the same thing on a larger scale. It’s a fundamentally different level of exposure.
“So the fair reading is that it hasn’t been round-tripping so far, but the new structure moves in that direction,” Vested Finance CEO notes
Nvidia’s financing risk: Key things to watch
- The guarantee line in the filing: It is about $3.5 billion today. Nvidia reports its next results on August 26. If that number suddenly jumps several times, that means that the risk has moved into the accounts.
- Who the customers are: Four customers each make up more than 10% of Nvidia’s sales, with the biggest accounting for more than 20%. Now, the important thing to observe here is: how many of these customers has Nvidia also invested in or financed? Where those two lists overlap is the actual circle.
- What lenders charge to insure Nvidia’s debt: This is one of the most useful and least discussed signals. It has roughly doubled since November, with the biggest single-day jump on record this Monday. It is still low in absolute terms, so this does not mean Nvidia is in distress. But the reaction is worth watching: Nvidia’s stock fell about 5% on Monday, while its credit market saw a record move.
- What equity and credit investors are seeing: Equity investors saw these deals and read demand. Credit investors saw the same deals and read the obligation. When those two disagree, the credit market is often the earlier warning sign.
What would signal Nvidia’s financing loop is breaking?
“It will first show up in the lending market, because that is where the money is actually coming from,” says Shah.
It can be an AI data-centre loan that cannot be completed at the interest rate everyone expected, or a bond sale being pulled, a loan requiring a higher rate than the previous one, or a credit-rating downgrade.
“In fact, some warning signs have already started to appear. Recently, Oracle was downgraded to the lowest investment-grade rating, while Alphabet reported negative free cash flow for the first time since going public”
Another warning sign would be a major computing contract being renegotiated or a data centre being scaled back. “Announcements are one thing; actual deliveries are what generate revenue. The gap between the two is where problems are most likely to show up first,” he concludes
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