We keep hearing about how every additional investment Nvidia (NASDAQ:NVDA | NVDA Price Prediction) makes adds to the circularity, which, during the days of the AI boom, was quite common. Indeed, these kinds of rapid-fire circular deals may very well be adding to the web of risks that might unravel once an AI bubble finally does burst. But, at the same time, vendor financing from 26 years ago is fundamentally different from the deals Nvidia has been making amid the great AI data center buildout. Sure, on paper, things smell eerily similar to the 2000-era circular deals.
At the same time, though, Nvidia doesn’t have to push its hardware to anyone. In fact, it’s been fighting to keep up with demand that’s continued to be off the charts. We’ve entered an era where being in the front of the line for the new Nvidia chips is seen as a fundamental moat source, and until that changes, perhaps Nvidia is smart to reinvest in the AI revolution with the obscene amounts of free cash flow that’s flowing in during any given quarter.
The company has more than enough to invest in its own growth engine while beefing up its many moats, while having enough left over to bet on other companies, including private frontier AI labs, that stand to gain significantly as the AI revolution advances and matures. Given Jensen Huang’s ability to spot potential across the AI waters, I’d much rather the man invest than do anything else with the cash, including returning it to shareholders by way of share buybacks. Either way, the company will have more than enough coming in to spread across many buckets.
More than enough to go shopping across the AI stack
As for whether all these new deals (frontier labs, infrastructure providers, and more) are deal-breakers for those looking to buy the name at today’s seemingly reasonable valuations (around 31.0 times trailing price-to-earnings), I don’t think it is. Yes, similar things have happened in the lead-up to the 2000-01 bubble burst. But things are a whole lot different this time around. Nvidia has more than enough free cash flow coming in to do as it sees fit.
Arguably, reinvesting in AI is a way to expand Nvidia’s influence and dominance as the firm seeks to expand across the entire stack or five-layer cake, as Jensen Huang likes to refer to it. All the while, the firm is helping accelerate the AI revolution either via investing in the bottlenecks of AI or by enabling frontier labs to get the resources they need to grow as fast as they can.
Is a bit of caution warranted as new deals come in every month or so?
Perhaps. There’s bound to be a ton of new developments when it comes to Nvidia in any given week. But, at the same time, I think the deals, as circular as they may be, are helping the AI market, as a whole, expand. The company’s selling to some deep-pocketed giants that can’t seem to get enough. And until something changes, I wouldn’t count Nvidia’s appetite for deal-making as a negative against the company.
The bottom line
A big bet on Thinking Machines Lab or Safe Superintelligence is a development that would have sent just about any stock higher. But when it comes to Nvidia, investors seem a bit fatigued with the deal-making now since circularity is brought up just about every time. These are powerful AI innovators at the frontier that could rise up the ranks in Anthropic-like fashion. But it’s Jensen Huang writing the checks; the markets seem to be looking the other way.
If anything, the lack of positive reception in response to such deals, in my view, could be a hidden positive driver for the stock. In my humble opinion, discounting Jensen Huang’s ability to allocate capital is not a good move.
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