Nvidia emerges as the central bank of AI

NVIDIA

Yesterday 13:00

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Pranav Kiran
TORONTO, Oct 20 (Reuters Breakingviews) - Call it the Bank of Jensen. Chipmaker Nvidia’s NVDA.O outspoken CEO Jensen Huang has pledged massive support to keep the artificial intelligence economy humming. That includes a backstop for CoreWeave CRWV.O, whose shares are slumping as it burns cash to stuff data centers with Nvidia chips. Huang insists that the so-called neocloud is strong enough to stand alone. If lenders grow leery, though, the $5.3 trillion chipmaker’s role as a kind of central bank for the industry could be tested.
Neoclouds borrow money to build server farms for blue-chip tech giants like Microsoft MSFT.O through to AI labs like Anthropic. Long-term contracts fetch about $10 million per megawatt of capacity and can give lenders confidence to fork over billions in debt. Yet truly juicy pricing, of perhaps $40 million per megawatt, goes to shorter-term deals.
With interest rates rising and neocloud debt selling off, the risk is that cheaper deals no longer clear companies’ cost of capital while funding becomes too stringent to chase richer opportunities.
Huang, like any good central banker, has been trying to ensure liquidity. Nvidia not only invested $2 billion in CoreWeave’s equity, but in September inked a $6.3 billion agreement to purchase any unsold capacity through 2032.
That should help smooth a move away from long-term contracts. The company employs credit facilities that pair chip purchases with specific customer contracts against which they’re secured. Early versions matched the maturity of the facility with the length of the contract. A more recent iteration, however, raised five-year debt against three-year agreements, introducing renewal risk. Nvidia should be able to help defray that by being a customer of last resort.
It’s important for Huang to keep this market humming: customers including neoclouds accounted for 45% of Nvidia’s $89 billion in data-center revenue last quarter, with so-called hyperscalers like Microsoft making up the rest, according to Visible Alpha data.
Bank of America analysts reckon that Nvidia’s backstop commitments across the AI ecosystem total $230 billion. The real nightmare scenario is that neoclouds can’t renew contracts, or that customers begin to default, destabilizing the guarantees on which lenders depend and freezing them out of credit markets. This is, to be clear, hypothetical. But it would threaten a massive source of demand for Nvidia.
At that point, Huang’s backstops would be tested. The Federal Reserve was able to extend vast support to the economy when credit froze up during the 2008 crisis. But Nvidia is not actually a money-printing central bank: presumably, if its customers suffer, so too will its own cash flow. The company can only sustain the AI boom so far.
     
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CONTEXT NEWS 
“CoreWeave’s strength is improving every day,” Nvidia CEO Jensen Huang told Bloomberg at an event on October 15 in Stockholm. “I’m optimistic. Their cost of capital is actually decreasing.”

(Editing by Jonathan Guilford; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on KIRAN/pranavkiran.t@thomsonreuters.com))