Nvidia's plan for Wall Street could add fresh fuel — and risk — to the AI boom
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A plan for Wall Street to underwrite data center debt partially backed by Nvidia could add fresh fuel — and risk — to the AI boom.
Why it matters: Like it or hate it, investment in AI data centers is the engine powering the stock market and much of the growth in the economy.
Catch up quick: On their own, the hyperscalers — Alphabet, Amazon, Meta, Microsoft and Oracle — are expected to spend roughly $800 billion this year and over $1 trillion in 2027.
- But both hyperscalers and smaller players, like so-called neoclouds, are using more debt to finance the spending push.
- And in recent months the bond market has periodically broken out with the yips over the size of some of these debts.
The latest: That's where Nvidia's plan comes in. The chipmaker has lined up six Wall Street giants to create more than $500 billion in "dedicated pools of capital," presumably long-term institutional investors like insurers and pension funds, to finance projects for Nvidia's customers.
- In some cases, Nvidia said it "may provide a residual-value support mechanism for up to 25% of an opportunity, assessed carefully on a project-by-project basis."
- In other words, the chipmaker could provide some type of guarantee for some projects, potentially cutting interest rates for borrowers and helping to keep the boom going.
Zoom out: Some analysts say that Nvidia putting itself on the hook for additional debt to finance still more investment in AI is a symptom of an investment boom tottering on the illogical.
- "The bull case is there's infinite demand for AI, and this is going to go on forever," said Jay Goldberg, an equity analyst covering Nvidia for Seaport Global Securities. "Somebody at some point is going to say, 'Whoa. Wait a minute, what are we doing?'"
- Analysts at UBS Global Wealth Management noted that Nvidia's strategy "raises further questions about AI circular financing, where suppliers help fund purchases of their own products and services."
The other side: Others see a strategic imperative to the Nvidia move, which could help smaller data center entities counter the financial advantages enjoyed by deep-pocketed rivals like Amazon, Alphabet and Microsoft.
- Those giants are also focused on using and even selling custom AI chips that could eventually pose a threat to Nvidia's GPUs.
- Nvidia wants "customers to use their GPUs, not competitors'," said CJ Muse, an analyst covering Nvidia for Cantor Fitzgerald. "And I think they view this as another competitive moat."
State of play: Stock market reaction to Nvidia's plan was mixed.
- Nvidia competitors — such as Broadcom — sank alongside large hyperscalers like Alphabet and Amazon. (Nvidia itself was flat.)
- Shares of financial players like KKR, Apollo and Blackstone rose.
- So did prices of companies that make key equipment data centers need like memory chips and companies associated with construction.
The bottom line: Few details are available about the plan, so we'll just have to wait and see how, or if, it will work.
