🍔The Bank of Nvidia (+New Stock Pick)

Supercharging the AI bubble

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The Bank of Nvidia

Nvidia partnered with 6 major Wall Street banks to provide private financing for AI infrastructure. Instead of requiring tech companies to pay cash upfront to buy chips, this allows them to borrow money to buy Nvidia’s chips and build out data centers.

Banks love to finance physical assets like real estate or energy infrastructure because these assets generate income and hold collateral value. They can’t do so with chips because chips become obsolete as soon as a next generation launches.

Enter Nvidia. They are offering to cover the banks’ loan losses if the chips unexpectedly lose value, effectively guaranteeing their residual value. Nvidia’s data show that its chips not only retain usefulness longer than expected, but their rental prices are actually rising. In other words, the chips are appreciating in value, not depreciating.

Chip rental prices rising

Part of this stems from the ongoing shortage as AI demand outstrips supply. But in general, older chips can transitioned to inference and other workloads, where they continue to generate value for years. Nvidia is betting that older GPUs won’t suddenly become worthless when faster models are released.

As evidence, CoreWeave just announced a deal for Nvidia A100 chips. That is, a design that was introduced in 2020 will retain economic value nearly a decade later.

NVDA stock fell -2% on the news as investors feared circular financing (where suppliers lend to customers to buy their products). It invokes memories of the dot-com bust and Enron. This is the wrong way to look at it.

Cloud providers and AI labs will benefit greatly from increased access to capital. With debt, they can expand capacity faster without draining corporate reserves, thereby accelerating AI development.

For Nvidia, this unlocks new demand by helping customers secure needed funding. Previously, Nvidia would’ve had to provide loans or buy equity in the customer. Now, willing banks are stepping in, reducing strain on Nvidia’s balance sheet. It’s a win-win-win situation.

It’s not without risks, of course. If these chips fail to generate an ROI, loans will default, leaving Nvidia on the hook. It accelerates the bubble’s implosion, whenever that day comes. Things usually go wrong when leverage is involved, and a scenario of waning demand is easy to envision.

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