獅山巡禮
投資雜談
Nvidias AI Deals Might Be Circular. Theyre Also Smart Business.
Artificial-intelligence leaderNvidiagenerated $112 billion in free cash flow in the past six quartersand more is coming, at an increasing rate. For companies that have reached this rarefied air, the inevitable question is what to do with all that money.Apple, for one, decided to buy back billions worth of stock and reinvest in its business. ForNvidia, the decision is to backstop the AI investment boom, where it remains the primary winner.
Nvidia, to be sure, has also done buybacks and reinvestments. In the past six quarters, the company has spent $58 billion on share repurchases. In August, the board authorized another $60 billion. In its recently reported second quarter, research and development expenses were up 39% from the year before.
Even with that spending, Nvidias cash and short-term investments have risen 11 quarters in a row, now up to $57 billion. In the past, companies would also use their cash for mergers and acquisitions, but the regulatory environment doesnt favor large deals anymore, as seen by Nvidias failed effort to buyArm Holdingsfrom 2020 through 2022. Today, Nvidia faces the same dilemma asAppledid in 2012, when it had over $100 billion in cash and securities. The companies have more than they know what to do with, and its piling up every day.
Nvidias AI backstop strategy began in 2023, when CEO Jensen Huang identified a small AI cloud provider calledCoreWeave, which at the time had $16 million in annual revenue. Since then, he has helped it grow into a company with a $80 billion market value. Huang didnt want to be dependent on a few hyperscaler cloud companies like Amazon Web Services,MicrosoftAzure, and Google Cloud, so he created a new customer by seeing thatCoreWeavegotearly allotmentsof Nvidias AI servers.
CoreWeave says it doesnt get any special treatment from Nvidia. What makes our relationship strong is execution, a company spokesperson says. CoreWeave has built the scale, infrastructure, and technical expertise to be a reliable partner, which is why customers and suppliers choose to work with us.
But theres no denying that Nvidia is CoreWeaves most important supplier and a key customer. It also owns about 5% of the companys stock. Huangs latest move came two weeks ago, when CoreWeave signed a $6.3 billion deal for Nvidia to buy any excess AI data center capacity, should demand from CoreWeaves multiyear contracts falter. CoreWeavesbusiness modelrequires rapid growth and massive debt to fund it. Nvidia is promising to backstop the effort. In so doing, its giving others more confidence to lend CoreWeave money for its ambitious growth strategy.
That same week, during a trip to the United Kingdom, Huang seemed to christen a new British CoreWeave-style company called Nscale. Like the CoreWeave of yesteryear, Nscale has little in the way of revenue. According to FactSet, the company raised one round of funding worth $155 million in December.
But now Nscale has the full faith and credit of Nvidia, and a $1.1 billion round of financing from a group that includes Nvidia. It also sports new contracts withMicrosoftand OpenAI for U.K. data center deployments, and it has plans to expand internationally.
In a videoposted to LinkedIn, Huang signed the Nscale partnership on a bottle of Johnny Walker Blue scotch, writing zero to 50 billion, in reference to Nscales growth. Ive never seen a start-up take off like that before, Huang said to Nscale CEO Josh Payne. I think youre on the Starship.
We couldnt do so without your support, Payne replied.
But the CoreWeave and Nscale deals pale in comparison to what came this past week, when Nvidia committed up to $100 billion to OpenAI, as part of OpenAIs plan to build 10 gigawatts of data centers for itself.
Data center developers have taken to sizing their projects by the power consumed, since the massive energy requirements are a limiting factor. Ten gigawatts would consume all of the power output from the most recently built U.S. nuclear reactor, Georgias Vogtle 4, which opened in 2024, plus another eight just like it.
OpenAI has large cloud computing contracts with Microsoft,Oracle, and CoreWeave, but CEO Sam Altman thinks he will need far more power than that in the future, and Nvidias $100 billion is onlypart of the equation. Nvidia will get shares of the leading start-up in the world, and its investment will be returned in the form of equipment sales. The stock Nvidia is buying will effectively cost nothing.
The deal also guarantees that OpenAIs new data centers will use Nvidia equipment, not competitors products.
The structure of the arrangement has caused some people to refer to it as circular financing. OpenAI needs the money more than anything, but Nvidia also needs a continuing flow of customer purchases.
OpenAI isnt the only AI company with large ambitions and no cash flow of their own. We could see similar circular deals with Elon Musks xAI, Anthropic, and other AI start-ups that burn through cash. Again, Nvidia would get shares, and the investment would be returned in the form of equipment purchases.
In the end, Nvidia is going to use future cash flows to be the investor of last resort in the AI world, a phrase used by D.A. Davidson analyst Gil Luria to describe the contours of the OpenAI deal. It wont let the AI boom go down without a fight.
