Is AI Demand 'Self-Sustaining'? NVIDIA's $7.5 Trillion Deal Raises Circular Financing Concerns

NVIDIA (NVDA-US) is pushing forward with a new AI infrastructure deal potentially worth over $7.5 trillion, supporting AI clients in expanding data centers through investment, financing, and collateral. However, concerns are rising in the market that this 'circular financing' could artificially inflate AI demand and corporate valuations.

NVIDIA announced last Friday a collaboration with South Korean SK Hynix (SKHY-US) parent company SK Group, with a deal size exceeding $5 trillion. Additionally, insiders reveal that NVIDIA is considering providing up to $2.5 trillion in collateral to OpenAI to help it lease computing power for a large data center project in the U.S., and is discussing financing for OpenAI's purchase of $3.5 trillion worth of NVIDIA chips.

Related negotiations are still in the early stages, and final terms may change, or the deal may fall through.

$7.5 Trillion Deal Raises Circular Financing Concerns

In recent years, NVIDIA has actively invested in AI developers like OpenAI, chipmakers like Marvell (MRVL-US), and data center companies like CoreWeave (CRWV-US), IREN (IREN-US), and Nebius (NBIS-US), aiming to accelerate the overall growth of the AI industry. Excluding the potential new OpenAI deal, the scale of similar collaborations announced by NVIDIA this year has already exceeded $5.4 trillion.

Gary Tan, portfolio manager at Allspring Global Investments, stated that NVIDIA's investments and collaborations indeed strengthen market confidence in long-term AI construction, but investors remain concerned about circular financing issues, as more and more funds are being used to support future AI clients and infrastructure deployment.

Critics argue that chipmakers investing in customers, who then use the obtained funds to purchase chips, may distort commercial incentives. If AI demand does not meet the market's high expectations, it could not only lead to incorrect investment decisions but also amplify losses in an industry highly interdependent. AI companies continuously taking on debt for building data centers and purchasing chips also make the entire industry more vulnerable to systemic shocks.

This practice is not unique to NVIDIA. Google (GOOGL-US) has agreed to provide collateral for Anthropic's rent payments for 5 data centers, helping this OpenAI competitor secure loans equivalent to $350 billion.

NVIDIA Considers Backing OpenAI, Deepening AI Industry's Funding Chain

Insiders point out that OpenAI may lease a data center park being developed by a SoftBank Group subsidiary in Ohio. The project is valued at approximately $5 trillion and has a scale of 10 gigawatts. NVIDIA may provide up to $2.5 trillion in collateral to OpenAI and finance its purchase of $3.5 trillion worth of chips.

Billy Leung, investment strategist at Global X Management, stated that if NVIDIA takes on more data center debt guarantees for OpenAI, it will further deepen the supplier financing that is currently under market scrutiny. While this deal can be seen as a signal of AI demand, it also reflects the financial pressure faced by AI infrastructure expansion.

OpenAI is not yet listed and continues to incur losses, but its computing power needs are constantly rising. NVIDIA's support may alleviate creditors' concerns and also help SoftBank founder Masayoshi Son expand his AI layout. SoftBank is expected to invest nearly $650 billion in OpenAI by October and sign a $400 billion transitional loan, but the massive bet on a single company also makes investors uneasy.

In South Korea, NVIDIA will collaborate with SK Group to build an AI data center with a total scale exceeding 2 gigawatts, consuming approximately the same amount of electricity as 1.5 million households. The first 'AI factory' built by SK Telecom is expected to be operational next year. The deal amount includes NVIDIA's purchase of memory chips and SK Group's purchase of NVIDIA's supercomputers.

NVIDIA will also invest $10 billion in South Korean network and cloud service provider Naver to help expand AI data centers adopting NVIDIA hardware. CEO Jensen Huang continues to deny circular financing allegations, emphasizing that the funds NVIDIA invests only account for a small part of clients' final fundraising needs. These investments not only drive its own business but also have the potential to create real investment returns.