Article: Nvidia is driving the AI boom. Good
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Just as Cisco’s sales of routers and switches presupposed exponential growth in web traffic, Nvidia’s GPU revenues assume endless demand for AI tokens.
Cisco was right about eventual demand but wrong about the timing—hence the dotcom crash.
...the scale of Nvidia’s financial commitments can look terrifying. Morgan Stanley puts its overall credit exposure—ie, its modest borrowing plus support for customers—at $200bn by the start of 2029. In time Nvidia’s shadow debt could reach $300bn or more.
Yet the differences from the dotcom boom are more important than the similarities.
Nvidia’s balance-sheet is extraordinarily robust. The company has $99bn of cash and is churning out more. In each of the past three years annual sales have roughly doubled. Gross margins have fattened from less than 60% to 75%.
This means that, whereas Cisco used debt, Nvidia can use cash to backstop its deals with buyers of its GPUs. Even if its commitments came due and its cashflows levelled off starting next year, by 2028 it would still be less leveraged than all but 39 non-financial firms in the S&P 500 are today. Profits would need to drop by 60% from that plateau for Nvidia to forsake its investment-grade credit rating.
And demand for AI is not illusory, as it was for Pets.com and other revenueless dotcom darlings. The sales of Anthropic, the leading AI lab, shot up from $5bn in the first quarter to $11.5bn in the second. OpenAI, its main rival, is probably not far behind.
All told, AI may be earning American tech around $150bn a year, from nothing a few years ago. That is still far from the $2.5trn needed to cover AI capital spending, but growth is fast.
...obstacle to the AI revolution is not lack of demand for AI but inadequate infrastructure.
The markets will not provide capital on the scale that is necessary, so Nvidia is offering financing itself. Nvidia has an advantage in understanding the balance of risks and rewards.
Although this bet is big enough to affect the economy, it is an entrepreneurial one. Every company that reinvests cash rather than returning it to shareholders also gambles that it can beat the market. Companies exist to make such concentrated bets. If investors want to diversify, they can do so themselves.