Nvidia Eases Major AI Market Concern: Analysts Say It Reduces 'Circular Transaction' Risks

According to MarketWatch, some investors have long worried about Nvidia's (NVDA-US) close financial ties with its customers. However, analysts believe the company's recently announced partnership should temporarily ease these concerns.

Nvidia recently announced a strategic partnership on 'independent computing financing' totaling over $500 billion, aimed at long-term support for artificial intelligence (AI) infrastructure development. The company stated that six firms, including Apollo Global Management, Blackstone, and Goldman Sachs, will provide third-party funding.

Joseph Moore, an analyst at Morgan Stanley, said in a report to clients that Nvidia's primary use of third-party funds to invest in AI factories—large-scale data centers—'should help alleviate market concerns over circular transactions.'

Nvidia CEO Jensen Huang posted on X on Monday that the company may provide up to 25% of the funding for individual investment projects on a case-by-case basis.

Moore noted that at this level of investment, 'professional third-party investor groups' will hold decision-making power, which should help dispel market skepticism that such transactions are 'purely driven by circular motives.'

Moore also believes that, given Nvidia's pivotal role in driving the AI ecosystem, this move clearly carries potential positive benefits for the company.

In its press release, Nvidia stated that these financing platforms will make its chips and other AI products 'investable asset classes' and generate 'revenue tied to long-term usage.' Moore explained that this means the transactions will be incorporated into Nvidia's previously announced revenue-sharing model, allowing the company to 'drive revenue growth from customers who may use Nvidia products 100% continuously.'

Bank of America analyst Vivek Arya shares a similar view, stating that these strategic partnerships are positive for Nvidia because 'the burden falls on financial institutions,' not on Nvidia's balance sheet.

Arya pointed out that for computing power to be considered an investable asset, its 'residual value must be maintained,' and Nvidia's chips meet this condition. In his report, he noted that Nvidia's GPUs are interchangeable and usable by different AI developers, while the CUDA software extends the chips' lifespan. Therefore, he believes resale and leasing prices for Nvidia GPUs will remain high.

Arya stated, 'This platform strengthens the CUDA moat while shifting capital risk away from Nvidia. In our view, this is a structurally bullish move.' However, he also noted that transactions enabled by the new partnerships still require actual funding from real customers.

Arya believes Nvidia's upcoming earnings call at the end of this month could provide 'much-needed confidence' to Wall Street and investors regarding the company's future role in supplier financing. Such financing can erode Nvidia's free cash flow. In his view, these funds 'might be more effectively deployed into the company's stock, which is currently significantly undervalued.'

Nvidia's stock closed slightly lower on Tuesday at $217.50 per share.

Morgan Stanley's Moore said the credit risk associated with Nvidia's backing of emerging cloud providers and sovereign AI initiatives will become 'the next major debate point for Nvidia stock.'