Inside Nvidia’s $500B AI Financing Loop

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Welcome to Prof. Jim Markets. I'm Ed Nelson. 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 yields on tenure treasuries inched lower head of the next inflation report

do 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. On 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 capsule to Nvidia's customers, helping them build more data centers and buy more chips, black rock 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 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 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 hegeographic quotes from all the participants, but how great they all were. 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. 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

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 than 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 look 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 know if they 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 4%. 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 tail?”

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's 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 this is all headed.

Jensen Huang wrote in the blog post sort of announcing a 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, 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 the customers. There's a fine line between enabling demand and creating demand. And Nvidia's been walking that line ever closer for a couple of years now. And I think it's, I think it's perfectly reasonable to provide some form of working capital loan. You lend your, you give them favorable terms. You let the customer pay six and a month, nine months. That's a form of financing. Or you loan them a little bit of money. It's common practice and a

lot of capex intensive industries. This one, I think, catches everyone's eyes. It's so big, 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. 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, you know, a misprice 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 get 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,

as they can buy from Nvidia, left hand, paying the right hand. Is 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 doing what, doing addressing it in that way.

“I think he is, he's very cognizant of what the street says about them and what the, sort of,”

what the zeitgeist on the, 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, as complicated as this is, and you want to call

it a financial engineering, or, you know, 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. If 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

of it. There's talking his blog post about a 25% coverage of certain things, sort of paying for the depreciation or is paying down to 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

interest rates would be too price too high. What that also boils down to is, some of this is

“ultimately a form of debt for Nvidia. And I think debt is very pricyclical, 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, at some point in the future, when the hyperscalers have run out of balance sheet and don't want to buy anymore, AI 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 due, and all the new 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 at the same time Nvidia's own core business sales will be declining, or margins will be declining, 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 the big sort of fear. It is debt, right? That $500

“billion dollars. It's 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. So I'm hedging a little bit, but yeah, it's debt. Like, let's ultimately it's a form of debt. The one thing that I just want to get your reaction to is, well, 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 the 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 a history here for Nvidia providing financing for customers. In the early days in 2022 and 2022 and 2023, Nvidia provided essentially what I've talked about before, easy working capital terms to the first round of Neil Clouds like Corriev. It was so hot back then that Corriev could take delivery of systems earn enough from running a system for a few months that they could pay back in video very quickly.

Over time as the Neil Clouds 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 back stops. 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. Now, today Nvidia already has, as a 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 footsteps. What's been happening in the on the debt side as these Neil Clouds, these do cloud service providers are coming up. There are hundreds of them now and they've all gone to lenders and said hey, you 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 Neil Cloud financing that have taken place, the debt is ultimately backed not by the GPUs, not the hardware, but by the customers. Microsoft signs a long-term agreement, they're going to buy this compute. That's the credit guarantee that the lenders want. Even that was enough and so Nvidia

“has had to step in more and more to provide sort of a top or on that commitment. I think a lot of the”

borrowers in this market would 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

need to use third parties as much. They're less willing to sign these deals with third-party Neil Clouds. They want to use their balance sheet for their own purposes, for buildings and data centers that they control. That sort of source of guarantee is not going away. It's not gone, but it's probably shrinking. What's going to provide the guarantee here? What's going to give me the collateral? Sure would be nice if the lenders would accept GPUs as collateral.

“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.

To his 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. In fairness to them, I will say that one of the big concerns around this market has been depreciation of GPUs. It's been a hotly debated. Michael Burris talked about it. You guys have talked about it. Jensen makes a valid point in that older hardware doesn't appreciate 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. 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 some of that too. We're 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 Golberg is Alex at Cport 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. Yes, we will be on break. For the next two weeks, we will be back on August 31st with a fresh episode until then,

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We're back with Proftry 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

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's losses more than doubled to $231 million. 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 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 stocks 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 are you making of space posts? Well both Rocket Lab and AST are trying to emulate SpaceX. They're trying to vertically integrate. 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 started off with rockets, buildings 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. 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 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 your 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, 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 video. 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. How has it

“affected things in the space industry? 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 at SpaceX. It's also had to really high valuation for the size of the business it actually has. So the full in SpaceX has been mirrored by a fallback 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 video. That should be a fairly

AOL back in 2000 buying Time Warner and it's changing its shares for real assets. But 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 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 solid mobile satellites. And that's exactly what AST is trying to do as well.

So Rocket Lab, I think, has a slightly better position. It's trying to avoid the head-to-head competition with SpaceX. It really 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 the valuation perspective. What do you make of the fact that SpaceX has been plowing so much of its money and also just in sort of its time? And it's 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. I mean, 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 are there about what is”

the ultimate size of the Starlink business and the launch business as well. So, you know, 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. Space, you know, it's a more limited market historically. It's been pretty small. Now, you are must spent half a weekend on X talking about how he was going to take over the internet and convey

most internet traffic over Starlink in the future and how it was going to serve lots of robots and every car in the world. You know, that's all a bit crazy, but I mean, I think it speaks to the fact that he's got a sort of talkups, space X and Starlink as well, because he can't just lean everything on AI. What do you make of the, some of the, the bold cases that we're hearing as it relates to space specifically, orbital data centers, asteroid mining, I mean, one of the other

big projects for space X is civilizations on Mars and civilizations on the Moon, it seems a little nuts, but are those, are those real, are those businesses that are actually going to materialise in your view? Well, I think they're all far into the future and I think what must flew out now on the earnings call last week with the statement that Starchips is going to be launching every day next year, you know, 12 months from now and that's not going to be filled with people

going asteroid mining or colonising the Moon or any of these sorts of things, not even going to be filled with data centers, because they have to go and get their tariffab factory built to make the chips that are going to go on those satellites, they're going to have to get this launch site, they're buying some more land in Louisiana, 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, you know, every week or every day, even,

“that's going to have to be filled with starlings satellites and and that's why he's so keen to”

highlight that, you know, there's this huge market for starling. What is the most realistic bulkcase in your view for the space industry? Like, 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, to vegetable. You know, today Starlink has made a lot of progress, it's got to,

you know, $10 billion of revenue over 10 billion last year, but that's just really 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 telecoats and that's why we hear all it's noise about what TMO Bio and AT&T and for Ice and Think of all this. Data centers are the

say, well, let's put all these data centers in space because we're not going to have all these

environmentalists. Well, you know, maybe, but maybe they might object to launch sites as well. But, you know, 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, you know, people forecast space is going”

to be much better than on the ground now is, you know, it's hard to believe that space is going to include, improve so quickly, but stuff on the ground isn't going to get solved as well. You know,

nuclear power stations on the ground, you know, might solve the power problem. You know, there's a

long land in places like Texas that aren't necessarily going to be so environmentally sensitive as other states around the country. You know, 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. Start-up 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

Wong, the next Bill Gates. The upside is, it does mean more business formation, but the downside is this, from sand back and free to Elizabeth Holmes and now Phoebe Gates. Too many young people have gotten drunk on the collade 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 down to lawn, Christenau Donahue and Mia Solverio, and our social producer is Jake McPherson. Thank you for listening to "Proftly Market" from Proftly Media. If you like what you heard, give us a follow. I'm Ed Allison. I'll see you tomorrow. (upbeat music)