Nvidia’s $100 billion funding in OpenAI has analysts asking about “round financing” inflating an AI bubble

Whereas Nvidia’s newest announcement is by far the biggest instance, the AI chipmaker has engaged in a collection of “round” offers wherein it invests in, or lends cash to, its personal prospects. Vendor financing exists to a point in lots of industries, however on this case, round transactions could give traders an inflated notion of the true demand for AI.

In previous expertise bubbles, income “roundtripping” and tech corporations financing their very own prospects have exacerbated the injury when these bubbles finally popped. Whereas the share of Nvidia’s revenues which might be presently being pushed by such financing seems to be comparatively small, the corporate’s dominance because the world’s Most worthy publicly-traded firm signifies that its inventory is “priced for perfection” and that even minor missteps might have outsized impression on its valuation—and on monetary markets and even perhaps the broader economic system.

The extent to which the complete AI increase is backstopped by Nvidia’s money isn’t simple to reply exactly, which can also be one of many unsettling issues about it. The corporate has struck plenty of funding and financing offers, a lot of that are too small individually for the corporate to contemplate “materials” and report in its monetary filings, though collectively they could be vital.

As well as, there are such a lot of interlocking rings of circularity—the place Nvidia has invested in an organization, akin to OpenAI, that in flip purchases companies from a cloud service supplier that Nvidia has additionally invested in, which then additionally buys or leases GPUs from Nvidia—that disentangling what cash is flowing the place is way from simple.

Tangled webs of funding

Two of essentially the most distinguished examples of Nvidia’s net of circuitous investments are OpenAI and Coreweave. Along with the newest funding in OpenAI, Nvidia had beforehand participated in a $6.6 billion funding spherical within the fast-growing AI firm in October 2024. Nvidia additionally has invested in CoreWeave, which provides information heart capability to OpenAI and can also be an Nvidia buyer. As of the top of June, Nvidia owned about 7% of Coreweave, a stake value about $3 billion presently.

The advantages that corporations get from a Nvidia funding prolong past the money itself. Nvidia’s fairness stakes in corporations akin to OpenAI and Coreweave allow these corporations to entry debt financing for information heart tasks at doubtlessly considerably decrease rates of interest than they might be capable of entry with out such backing. Jay Goldberg, an analyst with Seaport International Securities, compares such offers to somebody asking their dad and mom to be a co-signer on their mortgage. It provides lenders some assurance that they could really get their a refund. 

Startups financing information facilities have usually needed to borrow cash at charges as excessive as 15%, in comparison with 6% to 9% that a big, established company akin to Microsoft might need to pay. With Nvidia’s backing, OpenAI and Coreweave have been in a position to borrow at charges nearer to what Microsoft or Google would possibly pay.

Nvidia has additionally signed a $6.3 billion deal to buy any cloud capability that CoreWeave can’t promote to others. The chipmaker had beforehand agreed to spend $1.3 billion over 4 years on cloud computing with CoreWeave. Coreweave, in the meantime, has bought at the very least 250,000 Nvidia GPUs to date—the vast majority of which it says are H100 Hopper fashions, which price about $30,000 every—which suggests Coreweave has spent about $7.5 billion shopping for these chips from Nvidia. So in essence, the entire cash Nvidia has invested in Coreweave has come again to it within the type of income.

Nvidia has struck related cloud computing offers with different so-called “neo-cloud” corporations. Based on a narrative in The Info, Nvidia agreed this summer time to spend $1.3 billion over 4 years renting some 10,000 of its personal AI chips from Lambda, which like Coreweave runs information facilities, in addition to a separate $200 million deal to lease some 8,000 extra over an unspecified time interval.

For individuals who imagine there’s an AI bubble, the Lambda deal is obvious proof of froth. These Nvidia chips Lambda is renting time on again to Nvidia? It purchased them with borrowed cash collateralized by the worth of the GPUs themselves.

Moreover its giant investments in OpenAI and Coreweave, AI chipmaker additionally holds multi-million greenback stakes in a number of different publicly-traded corporations that both buy its GPUs or work on associated chip expertise. These embody chip design agency Arm, high-performance computing firm Utilized Digital, cloud companies firm Nebius Group, and biotech firm Recursion Prescribed drugs. (Nvidia additionally not too long ago bought a 4% stake in Intel for $5 billion. Like Arm, Intel makes chips that in some instances are alternate options to Nvidia’s GPUs, however which for essentially the most half are complementary to them.)

Earlier this month, Nvidia additionally pledged to take a position £2 billion ($2.7 billion) in U.Okay. AI startups, together with at the very least £500 million in Nscale, a U.Okay.-based information heart operator that can, presumably, be utilizing a few of that cash to buy Nvidia GPUs to provision the information facilities it’s constructing. Nvidia additionally stated it could spend money on plenty of British startups, each immediately and thru native enterprise capital companies, and a few of that cash too, will doubtless come again to OpenAI within the type of computing purchases, both immediately, or by means of cloud service suppliers, who in flip might want to purchase Nvidia GPUs.

In 2024, Nvidia invested about $1 billion in AI startups globally both immediately or by means of its company enterprise capital arm NVentures, in accordance with information from Dealroom and The Monetary Instances. This quantity was up considerably from what Nvidia invested in 2022, the 12 months the generative AI increase kicked off with OpenAI’s debut of ChatGPT.

How a lot of this cash winds up coming proper again to Nvidia within the type of gross sales is once more, troublesome to find out. Wall Road analysis agency NewStreet Analysis has estimated that for each $10 billion Nvidia invests in OpenAI, it’s going to see $35 billion value of GPU purchases or GPU lease funds, an quantity equal to about 27% of its annual revenues final fiscal 12 months.

Echoes of the dotcom period

That sort of return will surely make this form of buyer financing worthwhile. However it does increase issues amongst analysts a few bubble in AI valuations. These sorts of round offers have been an indicator of earlier expertise bubbles and have usually come again to hang-out traders.

On this case, the lease preparations that Nvidia is getting into into with OpenAI as a part of its newest funding might show problematic. By leasing GPUs to OpenAI, quite than requiring them to purchase the chips outright, Nvidia is sparing OpenAI from having to take an accounting cost for the excessive depreciation charges on the chips, which can finally assist OpenAI’s backside line. However it signifies that as an alternative Nvidia must bear this depreciation prices. What’s extra, Nvidia may even tackle the chance of being caught with a listing of GPUs nobody desires if demand for AI workloads don’t match Nvidia CEO Jensen Huang’s rosy predictions.

To some market watchers, Nvidia’s newest offers really feel all-too-similar to the excesses of previous expertise booms. In the course of the dot com bubble on the flip of the twenty first Century, telecom gear makers akin to Nortel, Lucent, and Cisco lent cash to startups and telecom corporations to buy their gear. Simply earlier than the bubble burst in 2001, the quantity of financing Cisco and Nortel had prolonged to their prospects exceeded 10% of annual revenues, and the quantity of financing the highest 5 telecom gear makers had offered to prospects exceeded 123% of their mixed earnings.

In the end, the quantity of fiber-optic cabling and switching gear put in far exceeded demand, and when the bubble burst and lots of of these prospects went bust, the telecom gear makers have been left holding the unhealthy debt on their stability sheets. This contributed to a larger lack of worth when the bubble burst than would have in any other case been the case, with networking gear companies shedding greater than 90% of their worth over the following decade.

Worse but have been corporations akin to fiber-optic large International Crossing that engaged in direct “income roundtripping.” These corporations reduce offers—usually on the finish of 1 / 4 in an effort to hit topline forecasts—wherein they paid cash to a different firm for companies, after which that firm agreed to buy gear of precisely equal worth. When the bubble burst, International Crossing went bankrupt, and its executives finally paid giant authorized settlements associated to income roundtripping.

It’s reminiscences of those sorts of transactions which have precipitated analysts to at the very least increase an eyebrow at a few of Nvidia’s round investments. Goldberg, the Seaport International analyst, stated the offers had a whiff of round financing and have been emblematic of “bubble-like habits.” 

“The motion will clearly gas ‘round’ issues,” Stacy Rasgon, an analyst with Bernstein Analysis, wrote in an investor notice following Nvidia’s announcement of its blockbuster funding in OpenAI. It’s a good distance from a priority to a disaster, after all, however as AI firm valuations get increased, that distance is beginning to shut.