The cocaine nose jobs of Wall Street are betting that Nvidia’s AI chips can dodge the usual tech depreciation curse.
For those who came in late, Nvidia unveiled a $500 billion deal this week that lets tech outfits lease semiconductors with financing from Apollo Global, KKR, Brookfield, BlackRock and Goldman Sachs.
The monster partnership rests on hopes that chip prices will stay higher for longer than many analysts expected. According to the Financial Times, finance executives involved in the deal say that demand for AI kit is still bonkers.
Nvidia chief Jensen Huang has said the pact will create a new asset class backed by chips. Huang thinks it will be ripe for investment from the $22 trillion private capital industry.
Investment industry bigwigs, including Blackstone president Jon Grey and BlackRock chairman Larry Fink, have said their firms want to throw cash at new data centres.
That money is meant to feed the bottomless appetite for training and running the latest AI models. The funding wheeze comes with a nasty risk. Financiers might misjudge how long demand for Nvidia chips lasts and what the hardware is really worth.
Creative Strategies technology analyst Ben Bajarin said: “The whole thing is predicated on continual investment. There’s a risk of overbuild, that demand eases, that models improve and don’t need as much compute.”
Unlike rental cars or commercial jets, chips do not have a cosy pool of buyers waiting if a customer defaults. For debt backed by chip leases, many lenders want loans fully paid within three to five years. The assumption is that the underlying asset will be worth little after that.
Chip buyers and lessees must build data centres, so expected revenue can lag miles behind spending plans.
Huang has argued that even Nvidia’s older H100 chips are holding value longer than forecast because demand for compute remains ridiculous. In a post on X on Monday, Huang said rental pricing for recent chips had increased. He said even the six-year-old A100 chips were still being used for longer than expected.
Nvidia’s most powerful chips, known as graphics processing units or GPUs, remain in high demand from AI labs training cutting-edge models.
Tech groups are still willing to use older hardware for simpler jobs such as answering user queries, which keeps the old silicon earning its keep.
Nvidia has stretched chip life by regularly updating CUDA, its software platform. CUDA is central to Nvidia’s grip on AI processing, letting customers use GPUs to speed up AI applications.
Bajarin said rampant demand for chips of all kinds should support Nvidia’s scheme in the medium term. Longer term, success depends on cutting the total cost of ownership.
Nvidia will guarantee that the chips hold at least 25 per cent of their value through the lease term. That puts the $5.3 trillion chip giant on the hook for any early losses if the shiny AI hardware stops looking so shiny.
One Nvidia executive described Nvidia’s guarantee as “the first lost piece” of future financings, meaning the company would eat early chip value losses beyond certain projections.
That guarantee has private capital firms thinking chip financing deals can be bundled into securities and sold to debt buyers such as insurers.
The idea taps big pools of cash inside Apollo, KKR and Brookfield, because apparently even depreciating silicon can become structured finance if you squint hard enough.
It would appear that the cunning plan is that GPU leases would standardise pricing and create efficiencies for AI groups. Public debt investors would later enter the market as people begin to figure it out.
The deal structures will vary between financial companies. Some may create specialist finance companies for chips and structure loans like collateralised loan obligations.
This means that Wall Street could solve another problem for Nvidia by easing pressure on the company to finance its customers directly. BofA Securities research analyst Vivek Arya said support from major financial institutions could let Nvidia move away from vendor financing.
That is where Nvidia gives direct guarantees to help clients raise debt in capital markets, which is not exactly what shareholders expect from a chipmaker.
Arya said the deal with the cocaine nose jobs of Wall Street was positive for Nvidia because “the burden sits with the consortium, not Nvidia’s balance sheet”.
