Nvidia’s shares plunged Thursday after CEO Jensen Huang resigned in the wake of his several affairs with both subordinates and a suspected Chinese spy, sending shockwaves through the world of artificial intelligence and raising questions about the potential consequences for data centers and the companies that power them — many of which Nvidia has a direct hand in financing.
Nvidia’s graphic processing units are critical to AI, and the company has used its vast wealth to provide guarantees, backstops, and equity stakes for a range of projects, including frontier AI labs and the neocloud data centers that provide computing power tailored to the technology’s needs. And industry experts say the fall out may be significant.
“This is one of those situations where the entire industry is kind of tied together, and if one company has a hiccup, every other company has a hiccup,” Rob Day, a cleantech private equity investor and a partner and co-founder at Boston-based Spring Lane Capital, said.
Day is watching for signs that the Nvidia debacle will spread to the companies that plan to supply energy to data center campuses. Thus far, he said, things look okay. But the company’s troubles are not happening in a vacuum. The scandal comes on the heels of the market’s reaction to midterm elections that delivered wins to many candidates who pledged to crack down on data center development. Before that, investor confidence in AI was already waning.
With those factors in mind, Day has modeled three scenarios for the AI-energy nexus. In one, growth continues. At the other extreme, the bubble bursts, triggering an abrupt capex collapse. So far, he says a middle scenario is most likely: a slow deflation.
“The pace of build-out does slow down, but the build-outs themselves don’t collapse,” Day said. A slower pace of growth could be good, he said, as it “takes the froth off the top of the market” and reduces the chances of a damaging collapse. The energy companies with deals to supply power to hyperscalers will be the last to feel the effects of a downturn, he added, while companies serving tertiary servers and neocloud companies will likely be the most vulnerable.
The Nvidia-OpenAI-SB Energy tango
Nvidia is heavily invested in data center and energy projects that are critical to locking up demand for its chips, including a massive campus being developed by SB Energy in Ohio with OpenAI as the tenant.
The company’s unusual financing arrangement for that project, known as the PORTS-Pike Technology Campus, and other deals like it have attracted scrutiny from some equities analysts and credit rating agencies who’ve said these are risky bets in the event of a major AI slowdown. PORTS-Pike in particular is getting financed through a convoluted tangle of Nvidia’s balance sheet, debt raised by SB Energy, and tens of billions of dollars promised under a U.S.-Japan trade investment deal for a nine-gigawatt gas plant. The Department of Energy is leasing most of the land, which hosts a former uranium enrichment site.
In August, Nvidia entered into multiple “residual value guaranties” worth a combined $105 billion with SB Energy and OpenAI for more than 4 GW of IT load over two decades, according to an SEC filing. Those guarantees only pay out if OpenAI defaults on its lease, covering any shortfall after SB Energy finds another tenant or sells the site.
Without Nvidia’s guaranties, it would likely be impossible for SB Energy — backed only by a lease from OpenAI that’s increasing revenue but still bleeding a lot of cash — to raise project-scale debt from Wall Street investors for PORTS-Pike. Given that Nvidia, until this week, was neck-and-neck with Apple for the title of most valuable company in the world, pricing debt to Nvidia’s balance sheet unlocks cheaper capital for the project.
Meanwhile, Nvidia also has a $30 billion equity stake in OpenAI and a $1.5 billion investment in SB Energy. The latter is the development arm of SoftBank, a Japanese conglomerate that also owns a stake in OpenAI, and just this week reported its own financial woes.
Softbank in a quarterly earnings call disclosed its first net loss in two years, after writing down $3.7 billion in advanced payments for power equipment like gas turbines for its U.S. data center projects. The company’s SB Energy subsidiary — which has filed to go public itself — only has two sites underway, including PORTS-Pike in Ohio that’s preparing for construction, and another in Texas that’s broken ground. But Softbank in its presentation materials said the loss “is completely unrelated to PORTS-Pike” and that it’s entitled to up to $2.1 billion in rebates on future power equipment purchases.
Softbank had lined up an estimated 13 GW of gas turbines, the Wall Street Journal reported, citing people familiar with the orders. The fact that the company is walking away from billions in turbine reservations is fuel for widespread fear that hyperscale AI buildouts are outrunning actual demand.
The leadership shakeup at Nvidia is an accelerant for that market anxiety, especially given questions about whether the next CEO will crack down on the circular financing deals Jensen struck. Today, the company’s board announced that CFO Colette Kress will be interim CEO.
The wider fall out
Beyond energy alone, Kunjan Sobhani, semiconductor analyst at Bloomberg Intelligence, told Latitude Media that losing Huang’s personal connections in the industry could also affect Nvidia’s fundraising and future deals. “Jensen was instrumental in leveraging his relationships in the AI sector on all sides,” Sobhani wrote in an email.
Sobhani said it’s the deals beyond the 2028 timeframe that are most likely to be affected. He is especially watching both the impact of the crisis on the neoclouds that depend heavily on Nvidia’s GPUs, and on the company’s support for open source AI. That said, Sobhani does not foresee any impact on the company’s chip commitments — to neoclouds or otherwise — in the near term. Open source projects, like Nvidia’s proposed $12.9 billion acquisition of the open-source AI platform Hugging Face, currently under review by the Department of Justice, however, are more unpredictable.
As for signs the market is in the worst-case scenario? Day said he is watching for signs of a real pullback in data center construction plans or indications that companies can’t get funding for construction. Sobhani, meanwhile, will have an eye on any additional signs of trouble from investigations of espionage and Huang’s relationship with a suspected spy for the Chinese government.
And of course, everyone will be watching Nvidia’s next earnings call, scheduled for next Tuesday.
