Inside Nvidia’s $500B AI Financing Loop

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2:11Money market matters. If money is evil, then that building is hell. The show goes on! The show goes on! The show goes on! Welcome to Prof G Markets. I'm Ed Elson. It is August 12th. Let's check in on yesterday's market vitals. The major indices declined again after another day without progress in Iran. Brent crude climbed. The yield on 10-year treasuries inched lower ahead of the next inflation report due this morning. And finally, Apple shares fell more than 1 % on news that its head of Apple Pay is retiring. OK, what else is happening? NVIDIA is joining forces with Wall Street in one of the most ambitious financing efforts ever attempted.

2:56On Monday, NVIDIA announced memorandums of understanding with six major asset managers to secure half a trillion dollars to fund the AI build-out. The firms will lend that capital to NVIDIA's customers, helping them build more data centers and buy more chips. BlackRock CEO Larry Fink called the project the beginning of, quote, the next future for financial engineering. And NVIDIA CEO Jensen Huang said that AI chips have now become an investable asset class. However, NVIDIA shares fell nearly 4 % on the news, which was first reported by the Financial Times. joining us to discuss this half a trillion dollar financing arrangement.

3:42We are speaking with Jay Goldberg, analyst at Seaport Global Securities. Jay, thanks for joining us on the show. I've been looking at this$500 billion deal. I can't really tell what the deal actually is. There are a bunch of Wall Street banks and firms involved. It's a big number, but who's lending money to what? What does the financing package actually look like? What do we actually know about this? We don't know a lot. There's a lot of unknowns in here. They had a press release out yesterday, and the press release was almost entirely sort of hagiographic quotes from all the participants about how great they all were.

4:23And then Jensen posted on Twitter today, gave a little bit more, a little bit of granularity to a couple things, but we don't really know. And I think it's worth pointing out that in the press release, it actually is very clear that the agreements are not finalized. So they don't know what the details are yet. Yeah. I mean, the term that jumped out to me was memorandum of understanding. I've heard that before in a deal with Iran that turned out to not be a deal and turned out to be a little bit of a disaster. Is that the right comparison here? I will say that NVIDIA had a similar MOU with OpenAI, I don't know, six months ago, eight months ago, eons in AI time.

5:09And they were going to invest a lot of money into OpenAI. And that deal, again, was press release before the contract was finalized, and it ended up not happening. Or it radically shifted. It was a very different deal the one that actually emerged six months afterwards. So NVIDIA is a company that cares a lot about its image and likes to keep people excited. And so they put out this press release. I'm curious. I don't know why they did it now. That's a little odd. I don't know the timing. It seems, I don't want to say premature, but there's just a lot of unknowns. What do you make of the stock reaction, the fact that NVIDIA shares fell nearly 4 %?

5:51I mean, if the idea was to inspire excitement and confidence, that's not what happened. What is the stock price telling us? What is Wall Street feeling on this deal? Yeah, I think there is an undercurrent among some investors, not all, but certainly sizable chunk of investors who are worried about circular financing. And this certainly looks like it's one piece of, it's a big piece of circular financing going on here because nvidia is providing money to customers to buy nvidia parts i think that makes people uncomfortable not you know run for the hills sell all our nvidia stuff but just like we're starting to see investors ask more questions about these kinds of deals and where where this is all headed jensen huang wrote in the blog post sort of announcing the deal he addressed that question he said quote is this circular financing and then he continued on to say this initiative is designed to address that concern.

6:50We are bringing independent long-term institutional capital into the AI infrastructure market. The demand is real. It comes from frontier AI labs, AI native startups, enterprises, cloud providers, and countries building AI services. The investors make independent financing decisions. I'm not sure he answers the question. He certainly doesn't say the word no, or the words it isn't circular financing. To what extent is this circular financing? What is circular about this, if at all? So I think there's a fine line between when companies provide financing for their customers, there's a fine line between enabling demand and creating demand.

7:33And NVIDIA has been walking that line ever closer for a couple of years now. And I think it's perfectly reasonable to provide some form of working capital loan. You give them favorable terms. You let the customer pay six months, nine months. That's a form of financing. Or you loan them a little bit of money. It's common practice in a lot of capex-intensive industries. This one, I think, catches everyone's eye because it's so big, right? Half a trillion dollars, like you said. And it's just not entirely clear. If you are coming from the point of view that AI is a bubble and nobody can articulate what the ROI on that investment is or what even the use case is or the business model, you had a guest on earlier this week who was talking about that.

8:26If you come from that viewpoint, this looks very much like NVIDIA is creating demand that might not exist otherwise. Now, NVIDIA's take is, no, no, we're not creating that demand. And we see a mispriced asset class, if you will. The lenders don't know how to lend to this. They're missing the point. They're missing the opportunity. They don't understand it. We will step in and help bridge that gap. I get the logic, but it's such a big number. And there's so many questions around it. It's hard to see this as something that's not NVIDIA giving money to customers so they can buy from NVIDIA, left hand paying the right hand.

9:04Is that the biggest risk for the company right now? Like, is that the main problem? And if so, is that why Jensen Huang is specifically calling it out in his blog post? I don't know why he's addressing it in that way. I think he's very cognizant of what the street says about him and what the zeitgeist on the street is. So I think he wanted to address that. But I do think there is a bigger concern here, which is as complicated as this is, and you want to call it financial engineering or a whole new asset class, ultimately it's debt. right and lenders lenders don't care about fancy technology they don't care about ai they care about when they're going to get paid back and ultimately who's responsible in the event of non-payment and so looking through all this we don't know but my strong suspicion is that nvidia is backstopping providing some form of guarantee not for the whole 500 billion but some some portion of it.

10:09There's talk in his blog post about a 25 % coverage of certain things, sort of paying for the depreciation risk, paying down, whatever the exact mechanism, we don't know. But NVIDIA is providing some form of guarantee, ultimately, that is giving the lenders comfort enough that they can lend at a reasonable interest rate, right? Because imagine the counterfactual, if NVIDIA weren't involved in this, what would happen? These deals wouldn't get done, right? Because the interest rates would be too pressed too high. What that also boils down to is some of this is ultimately a debt, a form of debt for NVIDIA.

10:46And I think debt is very pro-cyclical, right? When times are good, like they are now, everybody wants AI, so much demand, this is going to amp that up considerably. The problem is when the cycle turns and the cycle always turns, this kind of thing will amplify the pain on the downside, right? Because imagine what happens some point in the future when the hyperscalers have run out of balance sheet and don't want to buy any more AI or can't afford to buy any more NVIDIA GPUs, AI demand gets saturated. Just at that moment is when these obligations are going to come due. And all the neoclouds who have borrowed money from this platform are going to suddenly see unused capacity and they're going to put that back to NVIDIA.

11:32But at the same time, NVIDIA's own sort of core business, sales will be declining or margins will be declining. Earnings will trend downwards. And that's going to be, it makes it much more painful on the backside of this. That's the big sort of fear. It is debt, right? That$500 billion. I assume it's debt. You say it seems like it's mostly debt. That's what it is, right? It's just$500 billion in debt? Yeah. We don't know that. I'm hedging a little bit, but yeah, it's debt. Ultimately, it's a form of debt. The one thing that I just want to get your reaction to as well, he mentioned this idea that chips are an investable asset class.

12:14That seems to be kind of the main thrust of this announcement. And he said that on CNBC, he had this roundtable with all of the Wall Street CEOs. I want to play this clip and see what you make of it. This is really the first time that technology chips have become an investable asset class. This is a very big concept. It's a big concept because the computers, these systems are not like our PCs or like our phones. These are revenue generating assets. Now, they're productive. They're long lived. They're fungible. They're flexible. You can use it for all kinds of different things. Why is it so important to him to communicate that the chips are an investable asset class?

12:55And why is that such an essential component of this big announcement? So let me wind back the clock a couple of years. There's a history here for NVIDIA providing financing for customers. In the early days, in 2022 and 2023, NVIDIA provided essentially what I was talking about before, easy working capital terms to the first round of neoclouds like CoreWeave. and it was it was so hot back then that core weave could take delivery of systems earn enough from running those systems for a few months that they could pay back nvidia very quickly over time as the neoclouds and nvidia's ambitions grew that wasn't enough the numbers got too big and so nvidia started getting more actively involved and the the key thing they did at that point was they provided backstops right if you if you can't sell all the compute we're selling you, if you can't use it all, we'll buy some percentage of it.

13:51Now, today, NVIDIA already has, as of last quarter, NVIDIA had$30 billion of what they call compute service agreements in place. It's not on the books. It's not on the balance sheet, but it's in the footnotes. What's been happening on the debt side, as these neoclouds, these do cloud service providers are coming up, there are hundreds of them now. And they've all gone to lenders and said, hey, loan us some money so we can buy some GPUs. And the lenders look at that and they want collateral. And they have always said that the GPUs are not sufficient collateral. And so if you look at most of the really big neocloud financings that have taken place, the debt is ultimately backed not by the GPUs, not the hardware, but by the customers, right?

14:36Microsoft signs a long-term agreement, they're going to buy this compute. That's the credit guarantee that the lenders want. and even that wasn't enough and so NVIDIA's had to step in more and more to provide sort of a topper on that commitment. I think a lot of the borrowers in this market would really, really, really like to have GPUs themselves as collateral, right? Because we're at the point now where the hyperscalers who have been providing most of the commitment so far are getting much more aggressive in building their own capacity. They don't need to use third parties as much. They're less willing to sign these deals with third-party neoclubs.

15:19They want to use their balance sheet for their own purposes, for buildings and data centers that they control. And so that sort of source of guarantee is not going away. It's not gone, but it's probably shrinking. And so what's going to provide the guarantee here? What's going to be the collateral? It sure would be nice if the lenders would accept GPUs as collateral. And I think that's the message he's trying to get across. I personally don't think that's going to land with investors. I think they're still going to want to see some other forms of guarantees. And that's ultimately why NVIDIA is going to take on some form of obligation here.

15:55So he's basically saying, this is the anchor of the$500 billion in debt that I'm about to go raise. And you guys should all do the same thing because this is something that we can all do, right? That's right. Now, in fairness to them, I will say that one of the big concerns around this market has been depreciation of GPUs. Yes. This has been hotly debated. Michael Burry has talked about it. You guys have talked about it. Jensen makes a valid point in that older hardware doesn't depreciate quite as quickly as the worst, as the bears will say. And NVIDIA has actually done a really good job of updating and advancing the capabilities of its older platforms.

16:36So you can get more output, more tokens from a system now than you could a year ago from the same system through software and other tweaks. So there is some of that, too. He's trying to get that message across to you. And they've done a good job of that. I want to give them credit for it. But ultimately, it's trying to sell GPUs as collateral. And it's tough sell to investors. All right. Jay Goldberg is analyst at Seaport Global Securities. Jay, we really appreciate your time. Thank you. Thank you. After the break, an update on the space industry. And by the way, starting Monday, this show will be taking a summer vacation.

17:14Yes, we will be on break for the next two weeks. We will be back on August 31st with a fresh episode. Until then, enjoy your summer.

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21:03We're back with ProfG Markets. Two of the biggest space companies in America reported earnings Monday night, and neither one gave investors much to like. Rocket Lab brought in a record$234 million in revenue, up 62 % from last year, but it lost more money than analysts were expecting. AST SpaceMobile came in short on revenue and its losses more than doubled to$231 million. A big chunk of that loss was$126 million write-off from a satellite that Blue Origin had launched into the wrong orbit earlier this year. Both stocks fell on those reports. The real story for these two, though, goes back to June, when SpaceX went public and investors sold off the rest of the sector, presumably to buy in.

21:50Rocket Lab dropped 11 % on the day of SpaceX's IPO, and AST dropped 16%. Space stocks continue to slide through July, with some of them cratering as much as 40%. Today, SpaceX trades below its IPO price, But that money still hasn't come back to the rest of the space sector. So what is next for the space industry? We are speaking with Tim Farah, president of TMF Associates. Tim, thanks for joining us on the show. We got some pretty important earnings reports from two of the other big space companies, AST Space Mobile and also Rocket Lab. it seems that investors are getting kind of shaky about this sector right now.

22:37What do you make of the earnings and what do you make of space post SpaceX IPO? Well, both Rocket Lab and AST are trying to emulate SpaceX. They're trying to vertically integrate. So Rocket Lab started off building rockets. It moved into satellite systems. Now it's buying Iridium to add the application layer to that service. So that's the same as SpaceX, which started off with rockets, building satellites build up Starlink itself. AST started in a different direction they started building satellites to launch their own constellation they just raised over a billion dollars a couple of months ago to try and move into the launch business because they're struggling to get launches from third parties and as you said they had the problems with Blue Origin which were amplified when the New Glenn rocket exploded on the pad just after their failed launch.

23:30And now they're scrambling for launches. So, you know, all these companies are trying to put those three things together and build up their companies, but they're suffering from delays. So AST has got this problem trying to find launchers to launch its satellites. It's struggled to build as many satellites as it wanted to do as well. And then after that, it has obviously to stand up a service and try and compete head-to-head with Starlink. Rocket Lab, you know, they're launching their small rocket, but they've got this new, bigger neutron rocket coming along, and that's really, really delayed.

24:04You know, last year they were saying it was going to launch in 25. Now they're saying, we hope, 26. A lot of analysts are thinking probably 27. And that's really critical to launch more and bigger satellites and take advantage of this consolidation with Iridium. To what extent did the SpaceX IPO change the dynamics of this market? Because, I mean, you had a handful of names. These were some of the hottest stocks last year, the space stocks specifically. Then SpaceX comes along, gigantic company, one of the most valuable companies in the world. Presumably, that really shakes up the way this market works.

24:41How has it affected things in the space industry? Well, I think both Rocket Lab and AST had got very inflated valuations based on their current business i mean that's a lot the same as spacex it also has a really high valuation for the size of the business it actually has uh so the fall in spacex has been mirrored by a fallback in in these valuations as well but i think the difference between the two companies is that rocket lab is buying an established business with iridium that you know, should be a fairly solid business. It generates a bunch of cash flow. In a way, you could say maybe it's a bit like AOL back in 2000 buying Time Warner and exchanging its shares for real assets.

25:24But it's a good thing to do if you have a high-flying stock. And AST, on the other hand, has really been trying to do it all itself and now has sort of been stranded by the lack of launches. Are all of them inflated, in your view? Are they all overvalued? I think that's right. I think certainly where those companies have gone up to based on the current revenues and the profitability, I think it's hard to know how they will trade relative to SpaceX because SpaceX is so dominant in this business now. It's got all this cash in its balance sheet. Yeah, it may spend most of that on AI and stuff like that, but it's competing really heavily against, particularly against AST.

26:03We've heard all this news about SpaceX getting into the mobile business, competing with the mobile carriers, building a whole new generation of Starlink mobile satellites. And that's exactly what AST is trying to do as well. So, you know, Rocket Lab, I think, has a slightly better position. It's trying to avoid the head-to-head competition with SpaceX. Iridium is very much in the safety services, things like position, navigation and timing, things like aviation and maritime safety. not quite so threatened by SpaceX. But still, yeah, these things are going to trade. If people are negative about SpaceX, they're going to start to be negative about some of these other companies as well, at least on a valuation perspective.