Nvidia’s chips may be novel, but its ‘circular financing’ isn’t

{"text":[[{"start":5.24,"text":"The flurry of criss-cross transactions and partnerships among AI chipmaker Nvidia and its customers has created much consternation about circular financing. The term itself is ominous, and the companies themselves reject it. After all, circularity suggests something that ultimately goes nowhere."}],[{"start":23.12,"text":"But for all the fancy ways in which Nvidia is extending its support to the likes of OpenAI and data centre builders that use its chips, what’s really happening is old-fashioned vendor financing. Like telecoms equipment manufacturers, planemakers and department stores of old, the chipmaker is basically writing cheques to enable its customers to buy more of its products than they could otherwise afford."}],[{"start":46.72,"text":"There are a few twists to this new incarnation of the retail store card. For one thing, Nvidia has funded OpenAI and data centre operator CoreWeave by buying shares rather than making loans. Its unlisted equity investments hit $42bn at the end of April, from $3bn a year earlier, after announcing a $30bn investment in OpenAI and $10bn in Anthropic."}],[{"start":70.96,"text":"These transactions are not actually circular — which would suggest no value is actually created — but back to back. Equity investments aren’t necessarily funnelled directly back into buying chips. And even where they do result in a chip sale, nothing is given free. Nvidia gets the revenue, and still has a stake in a company."}],[{"start":90.12,"text":"Another spin on the plump-up-your-customer theme is the credit guarantee. Nvidia already backstops loans for some customers, totalling $3.5bn at the last count, but may soon offer support to OpenAI amounting to $250bn, according to the Wall Street Journal. The company would have to disclose the gross amount, but if structured as a credit derivative, it may not make much of an impact on its balance sheet."}],[{"start":114.24,"text":"Nvidia chief Jensen Huang seems now to be taking vendor financing a step further: by becoming his customer’s own customer. He has committed to $50bn worth of leases for a data centre in Texas that will host his company’s chips, the FT has reported — giving it the option to sublet the data centre’s services; in effect, it’s another kind of guarantee."}],[{"start":135.76,"text":"Financing customers makes more sense for Nvidia than it does for carmakers and department stores. The fast pace of AI means companies like OpenAI would struggle to raise sufficient equity or debt in the market to build computing power at the scale they think they need. If the industry’s bet on AI broadly works out, Nvidia gets a double benefit: profit from its chip sales, and also on its equity investments."}],[{"start":null,"text":"

"}],[{"start":159.56,"text":"But vendor financing is also a double blow when things go wrong: one loses one’s customer and one’s financial exposure. Credit guarantees ratchet up risk. Whereas a badly judged equity stake might later prove to be a waste of money, the requirement to take on a customer’s debts if things go awry can turn a valuation problem into a solvency problem."}],[{"start":180.72,"text":"That’s a distant worry. Nvidia has $80bn of liquid assets, and makes around $200bn of cash a year from its operations. If one or two customers trip up, it can roll with the punches. But as the numbers involved escalate, the formerly debt-averse company’s risk profile will change. Huang’s chips are cutting-edge; the pitfalls of vendor financing are as old as the hills."}],[{"start":208.8,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1785382786_1859.mp3"}