Nvidia’s AI moat is shifting from chips to capital

Nvidia’s massive head start in artificial intelligence turned the chipmaker into the world’s most valuable company. Now, almost four years into the generative AI boom, competitors like Advanced Micro Devices and Google have chipped away at Nvidia’s technology lead, pushing the company to take advantage of its other great asset: capital.

Following last week’s pact with Wall Street firms to pursue $500 billion worth of financing for Nvidia’s graphics processing units, Nvidia said on Monday that it’s providing up to $105 billion for a giant OpenAI data center in Ohio, offering a backstop of sorts should the ChatGPT creator see its fortunes turn.

For Nvidia, the strategy involves fueling the AI boom by whatever means necessary, recognizing that demand for critical infrastructure is seemingly insatiable but that a handful of companies — the hyperscalers — account for an outsized amount of purchases. With its quarterly free cash flow up 18-fold over the past three years to $48.5 billion in the latest period, Nvidia is using the strength of its balance sheet and credit rating to ensure there’s no dramatic slowdown following 12 straight quarters of revenue growth above 55%.

“They remain dominant, but they’re very paranoid about making sure they don’t lose ground,” said Ram Bala, associate professor of AI and analytics at Santa Clara University’s Leavey School of Business.

Nvidia declined to comment.

In a note to clients on Monday, analysts at Cantor brushed off concerns that Nvidia is effectively buying revenue through its financial maneuvering. They reiterated their buy rating and said the latest agreement is a “clear signal that the current AI investment cycle will be elongated and durable.”

“We view this less as circular and more facilitating the coming AI buildout while at the same time creating additional competitive moats that will continue to enable NVDA to remain THE AI leader,” the analysts wrote.

Nvidia is swimming in money. Its cash generation is so great that the company said in May that it was increasing its quarterly dividend to 25 cents a share from a penny, and announced a new $80 billion stock buyback plan. The company pledged “to return roughly 50% of free cash flow to shareholders this year.”

One way the company has been putting its cash pile to work is through equity investments in companies across the AI ecosystem, including some businesses — like model developers and neoclouds — that spend heavily on Nvidia’s chips and systems. Nvidia held $30.2 billion in marketable equity securities as of the most recent quarter, up from $12.9 billion a year earlier.

In February, Nvidia invested $30 billion in OpenAI, which relies on training capacity from Vera Rubin, the chip giant’s most advanced system. Monday’s agreement included a $1.5 billion investment in SB Energy, a SoftBank affiliate…