Chipwrecked: Nvidia’s Chip Empire Faces Challenges
However, Nvidia’s dominance in the AI data center market may be threatened by its own business model.
The company has invested heavily in AI companies, with over 70 investments this year alone, according to PitchBook data.
One of its key investments is in CoreWeave, a publicly traded company that has taken out debt to buy Nvidia chips for its data centers.
The Loan Cycle
Meanwhile, CoreWeave and other companies are using Nvidia chips as collateral for loans, effectively turning $1 in Nvidia investment into $5 in Nvidia purchases.
This creates a cycle where Nvidia has an incentive to bail out the industry as long as it can, due to the majority of GPU-backed loans being made using Nvidia’s own chips as collateral.
However, this also means that if something goes wrong with Nvidia’s business, the entire sector is in trouble.
Depreciation and Risk
Moreover, the value of GPUs depreciates quickly, making it difficult to determine their worth and lifespan.
Some investors, including Michael Burry, claim that many companies are making depreciation estimates that are astonishingly wrong.
This could lead to a situation where companies are unable to pay off their loans, and the lenders are left with repossessed collateral.
Consequences of a Bubble Burst
Consequently, if the AI data center boom were to burst, the consequences would be severe for companies like CoreWeave and other neoclouds.
They may have to take write-downs, provide more collateral, and face complications on their expensive loans.
This could lead to a chain reaction of events that would threaten the entire industry.
Uncertainty and Concerns
In addition, there are still many unknowns about the AI data center market, including how much GPUs are worth and how long they’ll last.
Some experts, like Ryan Little, are betting that even if some companies vanish, there will still be demand for the chips that secure the loan.
However, others, like Michael Burry, are concerned that many companies are making depreciation estimates that are too optimistic.
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