An analyst is looking past financing risks and noting that Nvidia could appeal to investors through its enhanced share buybacks
BofA thinks Nvidia's latest financing agreement is well timed.
Nvidia has faced criticism for striking financial deals with its customers and suppliers - but a BofA analyst says that investors who are willing to look past the potential risks of those arrangements could realize big gains.
According to a U.S. Securities and Exchange Commission filing Monday, Nvidia (NVDA) has entered into a partnership with SB Energy to provide up to $105 billion in financing for a data center in Pike County, Ohio, for which OpenAI will be the tenant. It's the latest example of Nvidia putting money behind efforts involving its partners.
But BofA analyst Vivek Arya wrote Monday that Nvidia's commitments to backstop OpenAI's leases are worth the risks that come with such financial entanglements - and outlined a case for Nvidia's stock to rise more than 55% from its current price of $225 a share
Arya said he thinks Nvidia's stock looks cheap relative to its free-cash-flow profile, and he believes the company could satisfy investors by delivering more of its cash back to shareholders.
The company's "ecosystem investments, especially into disruptive frontier labs and neoclouds, are critical to accelerating the [artificial-intelligence] cycle, though they risk lower earnings quality and a depressed trading multiple," he wrote.
"The most forceful counter," he added, may be a greater focus on buybacks. Nvidia puts only about half of its free cash flow toward buybacks, he noted, while some peers devote 75% to 100%.
One big reason Arya isn't sweating Nvidia's decision to guarantee OpenAI's leases lies in the details of the SEC filing. In the case of OpenAI's failure to pay or a default on its lease obligations, Nvidia will only guarantee the residual value, or the shortfall between the guaranteed minimum value of the lease and the amount that would be covered through a new lease or a sale. That payment obligation is capped at $105 billion.
Moreover, Arya points out that that the new agreement is less than what prior reports suggested Nvidia might pay. Previous reports suggested Nvidia could provide $250 billion in guarantees for a 10-gigawatt data center.
He also thinks the timing is right for this sort of agreement. Nvidia "is committed to the transformational nature of AI and to securing every input," Arya wrote. That goes beyond just chip supply and also to "land, power, shell" - meaning the location, electricity and physical infrastructure needed to actually host Nvidia's GPUs. "Today's conditions make this worthwhile," he said.
AI chips and data-center infrastructure have been scarce. The new deal allows Nvidia to secure the infrastructure needed to host its own chips before a competitor does, and further enables the company to expand beyond partnerships with Big Tech hyperscalers that are building their own custom chips.
That said, Arya noted that there are still risks for Nvidia if demand for AI slows, which could put pressure on its growth rate and balance sheet.
He pointed out that, in the case of an OpenAI default on its Ohio data-center obligations, the site could be resold to a new tenant. However, in the case of a slowdown in demand for AI, it's unclear how things would play out with a new tenant.
Arya said he expects the company to disclose more about its off-balance-sheet commitments when it reports earnings on Aug. 26.
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-Hannah Pedone
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