$IREN Ltd(IREN)$ Deal with $NVIDIA(NVDA)$
- $3.4B AI Cloud Customer Deal
- $2.1B Potential Investment
It is bullish, but here is my take:
First, this is not just a bare metal deal, as Iren plans to provide software through the recently acquired Mirantis.
These services have higher margins and will be a test of Iren’s transition from pure bare metal to AI software.
However, as part of this deal, Iren gave Nvidia the right to buy up to 30M shares of its stock at a price of $70 per share over the next 5 years. If Nvidia exercises all, it would mean an investment of $2.1B.
While this is certainly a positive development, the investment deal is not as great as the one Nebius signed with Nvidia.
Nvidia paid $NEBIUS(NBIS)$ $2B at market prices to acquire an 8% stake in the company. In this instance, Nvidia risked real capital immediately and is supporting Nebius efforts to build AI data centers with cash.
Nebius already got the cash.
Meanwhile, the Iren deal gives Nvidia **the option, not an obligation**, to purchase 30M shares for $70 a share within the next 5 years.
Yes, that is a 23% premium to Iren’s pre-announcement share price of $56, but Nvidia **doesn’t risk any capital now.**
Logically, Nvidia will only purchase shares at $70 if they are trading above that. Obviously, it won’t exercise their option if Iren trades for $60 as they would instantly be at a $10 loss.
Essentially, Nvidia is not taking any risk, and it’s **not helping Iren financially right now**.
It will help only if the future, and only if Nvidia feels like it.
Whilst with Nebius, Nvidia made an immediate $2B investment, risking its capital.
That seems like a bigger sign of confidence.
With Iren, Nvidia is not risking anything. They will only invest if it’s profitable to do so.
Nvidia has essentially negotiated a risk-free upside.
This deal is smart because it lets both companies have the cake and eat it, too.
Iren benefits from an immediate stamp of approval from the king of AI.
While the king of AI is not seeing any immediate outflow of capital and takes no risk.
However, Nvidia didn’t sign an AI cloud agreement with Nebius, so that is a plus.
Clearly, Nvidia wouldn’t have done so if they had no trust in Iren, they do.
But there is another angle from which to view this development.
Some analysts view it as Iren essentially giving an incentive to Nvidia to enter into the cloud customer relationship.
Iren wants to have a flagship customer deal with Nvidia to attract customers and new capital. It also wants good margins on this customer deal to show profits in the income statement, but Nvidia doesn’t want to overpay.
Again, with these options, Nvidia is guaranteed to make a profit on the equity if the share price is above $70, taking no risk.
This would not appear on Iren’s income statement as a discount to Nvidia, because legally and accounting-wise, it is not. It is dilution.
Iren is phrasing this as an incentive for Nvidia for executing on delivering chips to them.
“ The $2.1 billion NVIDIA investment is structured to reflect that. Their rights to invest only vest as NVIDIA GPU infrastructure is deployed across our campuses, and only fully vest upon deployment of 600,000 GPUs. NVIDIA’s capital is directly tied to execution. That’s not a passive financial investment. NVIDIA is a partner who wins as we deliver. “ Daniel Roberts, Iren CEO
I am sorry, but this seems strange.
Iren is the customer, yet they reward their supplier with options that only vest if Iren buys 600K GPUs?
Let’s say each GPU is $40K, so that’s $24B.
So, for spending $24B, Iren gets rewarded with $2.1B and dilution, but only if its stock price is high enough.
You would think that Iren would be immediately rewarded for committing to spend $24B with Nvidia, but instead, Nvidia is rewarded for Iren spending $24B.
While, in the long term, this deal is clearly beneficial for Iren, as the benefits from it exceed the option value.
Nevertheless, I still find the structure strange.
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