As its valuation rockets past the $4 trillion mark, the chipmaking titan Nvidia finds itself in an enviable yet precarious position. The company's specialised technology is the undisputed engine of the global artificial intelligence surge, but its aggressive strategy of financing its own customers is drawing intense scrutiny from investors and analysts alike.
The Web of Multi-Billion Dollar Deals
This year alone, Nvidia has orchestrated a staggering array of partnerships worth at least $125 billion. These range from a $5 billion investment in Intel to secure its footing in the PC market, to a colossal, decade-long commitment of $100 billion to OpenAI, the creator of ChatGPT. The latter involves Nvidia injecting $10 billion annually into OpenAI, funds that are largely earmarked for purchasing Nvidia's own cutting-edge chips.
Similar structures are at play with other key partners. The company has a significant arrangement with CoreWeave, a cloud provider that leases Nvidia's hardware to AI firms. Furthermore, Nvidia has utilised special-purpose vehicles (SPVs), such as one linked to Elon Musk's xAI, where a $2 billion investment is directly funnelled back into buying its products.
Echoes of the Dotcom Bubble?
This circular nature of financing—effectively lending money to clients so they can become customers—has sparked uncomfortable comparisons with past corporate collapses. Observers have drawn parallels with Lucent Technologies, a telecoms giant that aggressively lent to customers before unravelling after the dotcom bubble burst, and even with Enron, which infamously used SPVs to conceal debt.
Nvidia has vehemently rejected these analogies. In a recently leaked internal memo, the firm stated it "does not rely on vendor financing arrangements to grow revenue" and that its reporting is "complete and transparent," explicitly distancing itself from Enron's practices.
Nevertheless, the concerns persist. Renowned tech investor James Anderson, a self-professed admirer of Nvidia, noted that the OpenAI deal gave "more reason to be concerned". He reflected, "The words 'vendor financing' do not carry nice reflections... it has certain rhymes to it."
Betting the House on an AI Revolution
The fundamental risk for Nvidia is one of sustainability, not necessarily impropriety. As Charlie Dai, an analyst at Forrester, explains, the chipmaker is "leaning heavily on vendor-financed demand, which creates exposure if AI growth slows." The company's stratospheric success is predicated on a massive, timely payoff from the AI boom.
Nvidia and its customers, like OpenAI, are making a $1.4 trillion bet on computing capacity. Their collective health—and by extension, given Nvidia's market weight, that of the broader economy—depends on AI generating sufficient revenue to service the enormous debts from building out global data centres.
Nvidia's leadership remains bullish. Chief Financial Officer Colette Kress recently told investors they do not see an AI bubble, pointing to a future where trillions of dollars in business will come from upgrading existing data centre chips. However, the firm is also entwined in opaque, multi-billion dollar sovereign deals with nations like South Korea and Saudi Arabia, adding another layer of uncertainty.
These partnerships, while not circular, "concentrate risk in a few big customers," warns Dai. If the anticipated AI revolution faces delays or setbacks, Nvidia could confront significant write-downs on its equity stakes and unpaid bills, potentially jeopardising its meteoric stock market rise.
