Nvidia is trying to quiet ‘circular financing’ accusations. Wall Street is unsure it will
Wall Street is on the fence about chipmaker Nvidia’s latest financing initiative. Nvidia announced “memorandums of understanding” with six financial heavyweights on Monday, designed to provide half-a-trillion dollars of financing for Nvidia customers to purchase the company’s products. CEO Jensen Huang immediately got out in front of the question of whether Monday’s MOUs constitute more circular financing – agreements by which companies effectively pay themselves by investing in their own customers and one of the main criticisms of the AI buildout so far. “This initiative is designed to address that concern,” Huang wrote Monday in a social media post , assuring investors that “the demand is real” and that “the capital is not Nvidia revenue.” Some analysts on Wall Street agreed. “This appears to be a pivot away from vendor-financing … that drew circularity fire,” Vivek Arya at Bank of America wrote in a Monday note to clients. Arya said the burden of the capital commitment “sits with the consortium” of Apollo Global Management , BlackRock , Blackstone , Brookfield Asset Management , Goldman Sachs and KKR that Nvidia signed memos with, as opposed to “NVDA’s balance sheet” itself. Analysts at Morgan Stanley also took heart in the announcement, saying that it should “alleviate circularity concerns.” “For all of the handwringing over circularity, Nvidia’s actual direct credit exposure thus far is mostly confined to credit backstops with a couple of smaller neoclouds,” Joseph Moore at Morgan Stanley wrote on Tuesday. Markets reacted positively to the developments, sending Nvidia about 1% higher Tuesday. NVDA 1D mountain NVDA 1D Others on Wall Street were far more skeptical of the capital framework outlined in the MOUs. “In the end NVDA is still a part of the financing,” traders at Wells Fargo wrote in Tuesday. “NVDA seems to at some point still be financially committed to helping financing the buildout itself.” Wells Fargo traders said Nvidia’s financial ambitions are giving “investors relative pause.” Traders at Mizuho said in a Tuesday client note that they were “not sure this does much to quiet the growing concerns around circular financing.” “While this partnership expands the pool of available capital and could accelerate deployments, it doesn’t fundamentally answer the question of how much end-user demand and economic return sits underneath all of this spending,” the Mizuho traders wrote. And even the Morgan Stanley analysts questioned the extent to which the AI buildout can absorb more investment that relies on debt, regardless of its source. “The view that the AI ecosystem will take on more leverage is in itself an investment debate, even if Nvidia does not provide the leverage,” Joseph Moore at Morgan Stanley wrote. “The Nvidia view, and generally the view of the AI ecosystem, rightly or wrongly, is that this investment is not enough, given token growth of 10x or so.” AI data centers can burn through high-performance graphics processing unit chips quickly, and multiple Wall Street firms complimented the Nvidia memoranda for the assurances they provided on depreciation costs. “NVDA guarantees asset quality, not the debt – turning bears’ depreciation worry into the enabling feature,” Vivek Arya, the Bank of America analyst, wrote. Wells Fargo traders on Tuesday called the agreements a form of “depreciation insurance.”
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