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Nvidia And Wall Street Scheme Up A Way To Finance Chip Use
All on green // Illustration by Kate Walker
Nvidia and several Wall Street firms have cooked up a way to boost chip financing for startups trying to enter the crowded AI market.
The Big Picture: All roads run through Nvidia in the booming AI market… but it’s getting harder and harder to lease the chips needed for compute. Nvidia has been backing many of these deals on its own, sparking criticism of circular financing. Nvidia hopes the tie-up with Wall Street will buffer that criticism, but it could also put too much of the financial system’s weight on the company’s shoulders.
Behind The Plan: Nvidia and Wall Street firms are pitching chips as investable assets.
Nvidia is partnering with Apollo Global Management, BlackRock, Blackstone, Brookfield Asset Management, Goldman Sachs, and KKR on chip-backed special-purpose vehicles (SPVs) worth $500 billion.
This would allow big debt investors that want exposure to the AI market — like pension funds, insurers, and sovereign-wealth funds — to pour money into the SPVs, which would in turn be used to buy Nvidia chips that can be leased to AI-company customers.
This “securitization” — similar to what’s done with mortgages, airplanes, and credit cards — will presumably allow companies to access Nvidia chips without needing to buy them outright, especially since they’ve become prohibitively expensive thanks to Big Tech demand.
Closing Thoughts: The loans will be backed by Nvidia’s chips themselves — a big bet that the chips will hold their value over the long term, despite the company’s endless advancement of the tech. That’s a major paradigm shift from how chips were once viewed, with one prominent Nvidia investor hilariously telling WSJ that “historically, that’s an asset that’s had the shelf life of lettuce.” The Wall Street firms say the rabid demand compared to supply is what has changed that perception.
But that’s the main issue — the whole scheme is built on the idea that the AI market will be ever-growing for the foreseeable future. While AI is making company valuations soar, there still isn’t enough return on investment to call it a stable market. If things go south and demand for Nvidia chips suddenly dries up, the financial bottom could fall out.
There’s a reason why famed short investor Michael Burry (of The Big Short fame) said that it’s time for people to read up on Enron.
The Future: Despite the risks, expect these SPVs to be a hot commodity that leads to some big short-term gains — at least at first.
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Today’s email was written by David Vendrell.
Edited by Nick Comney. Polled and Copy-edited by Kait Cunniff.
Published by Darline Salazar.