The Central Bank of Nvidia, Part #2

In a Philochat (now only for paid subscribers) from this week I wrote that Nvidia may be the Central Bank — using its cash and strong balance sheet to fund the AI cycle — but Open AI is now the subprime lender.

In Part #1 we dissected the first 3 layers that explain how Nvidia catalyses and backstops the boom in AI investment.

In Parts #2 and #3 we will show how 1) compute and GPU dealmaking has become a tool of financial engineering 2) present extra layers (very important) that go deeper into the process 3) integrate the deals that Open AI has recently unleashed into the equation and 4) touch on the Nvidia Put and its effects in today’s AI-drive cycle.

Finally, we will explain how these monstrous deals make sense from Nvidia’s point of view — but spell disaster for the counterparties.

*Note: The extra layers also connect with Nvidia’s relationship with CoreWeave and Nebius.

Layer 4: The CSPs

While Hyperscalers can be understood as “Big Cloud” — we can understand AI infrastructure companies like CoreWeave (CRWV) and Nebius (NBIS) as “Small Cloud” — or the alternative Cloud Service Providers.

Nvidia has been running a very interesting playbook with Small Cloud.

While CRWV and NBIS have different business models, with the former running a debt-heavy balance sheet and the latter relying on cash-financed growth — they have been both on the receiving end of Nvidia’s alchemy.

Trojan Horse Leverage

• NVDA’s playbook with the CSPs and what it tries to achieve 👇
• Gain leverage against Big Cloud by creating alternatives to them
• Create CSPs that are big enough to make a difference to NVDA’s business..
• This is in case Big Cloud decided to bring the claws out and tries to take down NVDA, probably already in pay —> Custom Silicon is already gaining traction, and NVDA hates anything that threatens its dominance.
• By seeding Small Cloud with equity/debt or hard-to-get AI infrastructure, or even all of the above — NVDA creates stock market value for a CSP.
• The CSP can use that “stock market value” to raise equity/debt from non-NVDA funders.
• That capital is then used to buy more infrastructure from NVDA.
• This helps keep the business flowing while sucking the air out of from competitors like AMD. We will get to this in more detail.
• Holding all the cards in the equity/debt stacks of these companies means it will be tougher for them to pivot away from NVDA — if that decision ever came up.
• And so, we can think of these funding deals as Trojan Horses where a CSP that deals with NVDA becomes “captive” to them.

—> But what happens if the ever-expanding AI capacity of these CSPs at some point finds no demand to match it?

—> Doesn’t this eventuality risk bringing the house of cards to an abrupt end?

Enter the off-take agreement…

Layer 5: Onassis and Charter-Backed Finance

Legendary ship owner Aristotle Onassis used one major innovation to propel himself to the shipping halls of fame. Instead of using cash capital as the equity part of the stack — he used charter agreements. That financial innovation is called charter-backed finance.