Nvidia Stock Up 1,124%. Other Winners And Whether To Buy $NVDA

Nvidia's shares have surged over 1,100% since early 2023, yet its $100 billion investment commitment to OpenAI, structured to secure $350 billion in chip purchases in exchange for funding OpenAI's data center expansion, prompts concerns over "circularity." This strategy, reminiscent of Cisco's dot-com vendor financing, ensures significant demand for Nvidia's GPUs but at potentially lower margins and exposes Nvidia to the risk of write-downs if OpenAI, which projects substantial losses, fails to secure long-term external funding for its ambitious $1 trillion data center plan. While analysts forecast hundreds of billions in revenue for Nvidia from these deals, the arrangement highlights a potential AI bubble risk, urging investors to closely monitor Nvidia's revenue recognition and investment valuations.

Analysis

Nvidia's (NVDA) $100 billion investment commitment in OpenAI has introduced a significant layer of complexity to its investment thesis, despite the stock's 1,124% gain since early 2023. The deal structure, where Nvidia invests $10 billion for every gigawatt of OpenAI-built data centers in exchange for OpenAI purchasing $35 billion in GPUs, raises concerns of "circularity"—a practice where a company funds its own revenue growth. This strategy is reminiscent of Cisco's (CSCO) vendor financing during the dot-com era, which inflated revenues but resulted in a $900 million bad loan provision when the bubble burst. While analysts project the deal could generate up to $400 billion in revenue for Nvidia, it comes at the cost of lower margins on its cutting-edge chips. For Nvidia, the risk is not bad debt but a potential writedown on its investment if the money-losing OpenAI, which projects a $44 billion loss through 2029, fails to execute its ambitious $1 trillion data center plan. The deal's success hinges on OpenAI's ability to secure external financing, as its own capital costs were as high as 15% before this deal. The broader market reaction has been positive for AI infrastructure players, with the Generative AI hardware segment up 403%, significantly outperforming other AI sectors and underscoring the market's dependence on this capital-intensive buildout.

Key Decisions for Investors

• Investors should closely scrutinize Nvidia's revenue quality by monitoring the proportion of sales derived from customers in which it holds a significant equity stake, such as OpenAI and CoreWeave, to assess the degree of circular revenue.
• It is prudent to adjust valuation models for Nvidia to account for potentially compressed gross margins, as the OpenAI deal prioritizes guaranteed long-term demand over the typical higher margins on its advanced chips.
• Monitor the financial health and capital-raising activities of OpenAI, as its ability to fund its massive data center expansion is a critical dependency for Nvidia realizing the full $350 billion in potential GPU sales and avoiding a significant writedown on its investment.
• Consider diversifying AI exposure beyond Nvidia to other key beneficiaries in the hardware and cloud infrastructure ecosystem, such as Vertiv (VRT) and Taiwan Semiconductor (TSM), which are also experiencing significant growth from the AI buildout but have different risk profiles.