Nvidia's circular deals, such as its potential $100 billion investment in OpenAI and $10 billion commitment to Anthropic, could impact its valuation multiples, but the effect depends on how these deals are perceived by the market and their long-term financial implications.

Key Considerations:

Market Sentiment and Perception:

Positive View: If investors believe these deals will solidify Nvidia's dominance in the AI ecosystem and drive future revenue growth, valuation multiples (e.g., P/E, EV/EBITDA) could expand.

Negative View: Concerns about circular deals (where investments flow back to Nvidia's own customers) might raise questions about the sustainability of revenue growth, potentially compressing multiples if perceived as artificial or risky.

Financial Impact:

Revenue Growth: The deals could boost Nvidia's top line, as highlighted by CFO Colette Kress, who noted that the OpenAI agreement would add to the company's $500 billion in chip bookings. This could justify higher multiples if the revenue is seen as recurring and high-margin.

Profitability: If the investments lead to higher margins (e.g., through vertical integration or pricing power), multiples could rise. However, if costs (e.g., R&D, capital expenditures) escalate disproportionately, profitability metrics might suffer.

Industry Context:

Nvidia's valuation multiples are already elevated due to its leadership in AI chips. The market may tolerate higher multiples if the deals reinforce its competitive moat and align with long-term AI adoption trends.

Conversely, if competitors or regulators scrutinize these deals for anti-competitive behavior, multiples could face downward pressure.

Historical Precedents:

Similar circular deals in other industries (e.g., tech or energy) have sometimes led to short-term multiple expansion followed by corrections if execution risks materialized. Nvidia's track record of execution will be critical.

Summary:

While Nvidia's circular deals could initially buoy valuation multiples due to growth optimism, their long-term impact hinges on execution, revenue sustainability, and market perception. Investors should monitor:

The finalization and terms of the OpenAI and Anthropic deals.

Revenue and margin trends post-deal.

Regulatory or competitive responses.