Inside Nvidia’s $500B AI Financing Loop

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Find new episodes, Sundays, wherever you get your podcasts. Welcome to Profty 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 Treasury's inched lower ahead of the next inflation report due this morning, and finally Apple shares fell more than 1% on news that it's head of Apple pay is retiring. Okay. What else is happening? Nvidia is joining forces with Wall Street in one of the most ambitious financing efforts ever attempted. On Monday, Nvidia announced memorandums of understanding with six major asset managers to secure half a trillion dollars to fund the AI buildout. 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, we 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 dollar 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 is the financing package actually looked 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 hageographic quotes from all the participants, but how great they all were. And 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 and AI time. And 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 it all excited. And so they put out this press release. I'm curious, I don't know why they did it now, it's a little odd, I don't know the timing. It seems, I don't say premature, but like there's just a lot of unknowns. What do you make of the stock reaction? The fact that Nvidia has fell nearly four percent. I 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, so it's a big piece of circular financing going on here. Nvidia is providing money to customers to buy Nvidia parts. I think that makes people uncomfortable. Not run for the hills, sell all our Nvidia stock, but just like we're starting to see investors ask more questions about these kinds of deals and where this is all headed. Jensen Huang wrote in the blog post sort of announcing the deal, he addressed that question. He said, "Is this circular financing?" And then he continued on to say, "This initiative is designed to address that concern. We are bringing independent long-term institutional capital into the AI infrastructure market that demand is real. It comes from frontier AI labs, AI native startups, enterprises, cloud providers in 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? I think there's a fine line between when companies provide financing for the customers. There's a fine line between enabling demand and creating demand. Nvidia has been walking that line ever closer for a couple of years now. I think it's perfectly reasonable to provide some form of working capital alone. 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 cat-backs-intensive industries. This one I think catches everyone's eye because it's so big, half a trillion dollars, like you said. 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. If you come from that viewpoint, this looks very much like Nvidia's creating demand that might not exist otherwise. Now, Nvidia's take is, "No, no, we're not creating a demand. 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 to 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 in video, giving money to customers, as they can buy from Nvidia, left hand paying the right hand. Is that the biggest risk for the company right now? 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 doing what, doing, addressing it in that way. I think he is very cognizant of what the street says about him and what the, sort of, 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 a financial engineering or a whole new asset class, ultimately, it's dead. And 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. There's talk in his blog post about a 25% coverage of certain things Sort of paying for the depreciation risk paying down the 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 because imagine the counterfactual if Nvidia weren't involved in this What would happen these deals wouldn't get done right because the the interest rates would be too pressed too high What that also avoids down do is some of this is ultimately a debt a form of debt foreign video and I think debt is very Procyclical right when times are good like they are now everybody wants AI is 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 anymore AI or can't afford to buy anymore in video GPUs AI demand gets saturated Just at that moment is when these obligations are going to come do and All the Neal Clouds who have borrowed money from this platform Are going to suddenly see Unused capacity and they're going to put that back to Nvidia But but at the same time Nvidia's own sort of core business Sales will be declining or margins will be declining little you know earnings will trend downwards And that's going to be it makes it much more painful on the on the backside of this That's that's the the big sort of fear. It is debt, right? That five hundred billion dollars It's I assume it's debt you say it's seems like it's mostly that that's what it is, right? It's just five hundred billion dollars in debt. Yeah, I yeah, we don't we don't know that so we don't engage I'm hedging a little bit, but yeah, it's dead like let's ultimately it's a form of debt The one thing that I just want to get your reaction to as well He he mentioned this idea that chips are an investible asset class That 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 investible asset class This is a very big concept. It's a big concept because the computers these these systems are not like our PCs are 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 investible asset class and why is that why is that such an essential component of this big announcement? So let me wind back the clock a couple of years There's 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 Core Weave 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 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 will buy some percentage of it All right now today Nvidia already has as a last quarter Nvidia had 30 billion dollars of What do 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 in the 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 lonesome money so we can buy some GPUs and the lenders Look at that and they 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 Neoclouds, financings that have taken place The debt is ultimately back not by the the GPUs not the hardware but by The customers right Microsoft signs signs a long-term agreement. They're going to buy this compute That's 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 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 the hyperscalers who have been providing most of the commitments 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 these deals with with third party Neoclouds They want to use their balance sheet for them for their own purposes for their own for buildings and data centers that they control And so that that sort of source of guarantee is Not going away. It's it's not it's not gone, but it's it's probably shrinking and so what's gonna what's gonna provide the guarantee here What's giving me the collateral? It sure would be nice if the lenders would accept GPUs as collateral And I think that's 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. So he's basically saying This is the anchor of the 500 billion dollars in debt that I'm about to go raise And you guys should all do the same thing because this is 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, right? This has been the you know, totally debated Michael Burry's 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 is the bears will say And Nvidia's actually done a really good job of updating and advancing the capabilities of its older platforms So 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 there is some of that too. He's trying to get that message across to do and and they've done a good job of that I want to give him credit for it But ultimately it's it's trying to sell GPUs as collateral and it's it's not it's it's tough sell to investors All right, Jay Goldberg is out 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. 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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 Space Mobile came in short on revenue, and it losses more than doubled to $231 million as a big chunk of that loss was $126 million right 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. Rocket Lab dropped 11% on the day of SpaceX's IPO, and AST dropped 16%. SpaceX continued 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 Farrah, 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. What 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, moved into satellite systems. Now it's buying a radium to add the application layer to that service. So that's the same as SpaceX, which start up with rockets, buildings satellites, build up stalling 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. As you said, they had the problems with Blue Origin, which were amplified when the new Glenn rocket exploded on the pad just after they failed launch, and now they're scrambling for launches. So all these companies are trying to put those three things together and build up their companies, but they're suffering from delay. So AST has got this problem trying to find launches 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 stalling. Rocket Lab, they're launching their small rocket, but they've got this new bigger neutron rocket coming along. And that's really, really delayed. 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 the Rudium. 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 SpaceX stocks specifically. And SpaceX comes along gigantic company, one of the most valuable companies in the world, presumably that really shakes up the way this market works. How 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's also has a really high valuation for the size of the business it actually has. So the fall in SpaceX has been mirrored by a fall back in these valuations as well. But I think the difference between the two companies is that Rocket Lab is buying an established business with a Rudium. That 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 a AOL back in 2000, buying time warner and exchanging its shares from real assets. But it's a good thing to do if you have a high-flying stock. 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 and it's 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. We've heard all this news about SpaceX getting into the mobile business, competing with the mobile carriers, building a whole new generation of installing mobile satellites. That's exactly what AST is trying to do as well. Rocket Lab, I think, has a slightly better position. It's trying to avoid the head-to-head competition with SpaceX. Iridians 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 the valuation perspective. What do you make of the fact that SpaceX has been plowing so much of its money and also just at its time and its energy into the AI story? Because I look at space, and I'm like, this is a hot sector, this is what every investor has gotten so excited about, and then suddenly it seems like SpaceX pivots away from space. Space is now like a tenth of their business, and now it's all about AI. It's all about being something between a Google hyperscaler and an anthropic or an open AI. What does that say about the space industry if we're no longer the largest space company in the world? Isn't even a space company? Well, I think the question marks there about what is the ultimate size of the stalling business and the launch business as well, so AI, no one knows how big it is, but we all assume it's going to be many billions, if not trillions of dollars, not least because all the other companies are investing in it as well. It's a more limited market, historically, it's been pretty small. Now Elon Musk spent half a weekend on X, talking about how he was going to take over the internet and convey most internet traffic over stalling in the future, and how it was going to serve lots of robots and every car in the world. That's all a bit crazy, but I think it speaks to the fact that he's got to sort of talk up SpaceX and stalling as well because he can't just lean everything on AI. What do you make of some of the bull cases that we're hearing as it relates to specifically orbital data centers, asteroid mining, one of the other big projects for SpaceX is civilizations on Mars and civilizations on the moon. It seems a little nuts, but are those real, are those businesses that are actually going to materialize in your view? Well, I think they're all far into the future, and I think what Musk threw out there on the earnings call last week was a statement that Star Trek's going to be launching every day next year, you know, 12 months from now, and that's not going to be filled up with people going asteroid mining or colonizing the moon or any of these sorts of things, not even going to be filled up with data centers because they have to go and get their tariff factory built to make the chips that go almost satellites. They're going to have to get this launch site, they're buying some more land in Louisiana that they're going to have to build a new launch site for all these orbital data centers satellites. Those are going to take years. So next year, if Musk is right, and they're going to be launching starship every week or every day even, that's going to have to be filled up with starlink satellites. And that's why he's so keen to highlight that there's this huge market for starlink. What is the most realistic bull case in your view for the space industry? And what is the prize that might actually come to fruition in the space industry over the next few years? Well, the real question is how competitive space becomes with terrestrial. To date, starlink has made a lot of progress. It's got to $10 billion of revenue over $10 billion last year. But that's just real. taking business away from existing satellite companies, it's competing for people who didn't really have much option. Now they're starting to take on the terrestrial telcos, and that's why we hear all this noise about what TMO, BiOL and AT&T, and Verizon think of all this. Data centers are the same sort of thing. They've got to compete with terrestrial data centers as well. So people say, well, let's put all these data centers in space because we're not going to have all these environmentalists. Well, maybe, but maybe they might object to launch sites as well. But that's the real question, is how economic are things going to be in space relative to on the ground? And to be honest, I think people forecast space is going to be much better than on the ground now. It's hard to believe that space is going to improve so quickly, but stuff on the ground isn't going to get solved as well. Nuclear power stations on the ground might solve the power problem. There's a long landing places like Texas that aren't necessarily going to be so environmentally sensitive as other states around the country. I'm bullish about what might happen on the ground. And so I think that inevitably means that what we do in space is going to tend to be limited to a small percentage of the overall market. All right. Tim Farrah, president of TMF Associates. Tim, appreciate your time. Thank you. Thank you. Startup founder Phoebe Gates, the daughter of Bill Gates is being investigated for defrauding her clients with fake revenue numbers. According to Bloomberg, the Stanford grad engaged in something known in the affiliate marketing industry as cookie stuffing, a common form of fraud where you take credit for sales that you didn't actually drive. And according to Bloomberg, she knew what she was doing, but she did it anyway. Now, I could understand why a more desperate founder who needed the money might engage in this kind of thing, but it's unclear why you would ever try to defraud your way into financial success if your dad was Bill Gates. So the only explanation that makes any sense to me at least is more of a sociological phenomenon that we have discussed before. And that is this idea of the cult of entrepreneurship. And that is today, unlike any time in history, everyone wants to be a founder, because unlike in years previous, when being a founder basically just meant being a business person, today it means being a lot of other things too. It means being an influencer, a celebrity, a trend setter, maybe even a podcast host. These are the kinds of sociocultural benefits that are now associated with being a founder. And as evidenced by Phoebe Gates, it's now gotten to a point where it's not even about the money. It's about everything else. This is what happens when a society is trained to believe that its ultimate heroes are the founders of tech companies. Everyone wants to be the next Steve Jobs, the next Jensen Huang, the next Bill Gates. The upside is, it does mean more business formation, but the downside is this, from San Franklin Fried to Elizabeth Holmes and now Phoebe Gates, too many young people have gotten drunk on the cool aid that is founder worship. And as with any addictive substance, the ramifications can be devastating. Okay, that's it for today. This episode was produced by Claire Miller, and Alison Weiss, and engineered by Benjamin Spencer, our video editor is Brad Williams, our research team is Dan Shalan, Kristen Adonohue, and Mia Silverio, and our social producer is Jake McPherson. Thank you for listening to Property Markets from Property Media. If you like what you heard, give us a follow. I'm Ed Elson. I'll see you tomorrow.