Nvidia backs $36 billion of neocloud deals as their shares fall
Nvidia must pay only if a partner cannot pay, but credit markets for those partners are tight.
Nvidia had $36 billion in backstops for neoclouds (new AI cloud firms) in its July report. A backstop is a promise to pay if a partner cannot pay. Shares of three of these firms are down 30% or more this month. Nvidia also has a guarantee of a maximum of $105 billion for an OpenAI data center in Ohio. Nvidia gave no comment on the risk.
How it works
A backstop can be a promise of a minimum resale price or a minimum hourly price for chips. If OpenAI cannot pay for the Ohio data center, Nvidia can get control of the lease. It can also find a new tenant or tell the landlord to sell. For a new tenant or a sale, it pays the difference, to a maximum of $105 billion.
The numbers
The cost of insurance against default on CoreWeave debt is more than 11%. Nvidia shares are down 7.6% in October. In the first half of the year, Nvidia made $70 billion in free cash flow.
What is not known
The source names no default by a partner. Jensen Huang tells that demand for neoclouds is very high. David Trainer, head of a research firm, tells that a lower demand than the high expectations is a problem.
Insight: Nvidia now carries the risk of its own customers
Nvidia backs $36 billion of neocloud deals. Gartner tells that more than 80% of neocloud providers will stop operation. It tells that revenue will be $3.6 trillion, not the $8.5 trillion that owners must get. This reads as a loop: Nvidia gives money to buyers of its chips. A weak buyer can become its loss. Look at the share offers on hold and the cost of default insurance.
Sources
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