The departure of NVIDIA CEO Jensen Huang did not cause a widespread impact on the credit market, but it has prompted the market to begin to reevaluate NVIDIA's role as a financier for artificial intelligence infrastructure.
Jensen Huang resigned on Thursday amid a scandal involving spying and extramarital affairs. Since co-founding NVIDIA 33 years ago, he has built the company into a giant in the field of artificial intelligence. The Chief Financial Officer Colette Kress has been appointed as the interim CEO, and the company is currently searching for a permanent successor.
NVIDIA not only supplies graphics processors to hyperscale cloud service providers and technology giants but also provides financing to other companies to help them expand in the industry. Now, all of this may change.
Goldman Sachs analyst James Schneider stated in a report on Thursday: "Although we expect the company to fulfill all the commitments it has made previously, we believe that in the future, it may become more difficult for the company to negotiate new multi-party investments on such a large scale among ecosystem partners as it does currently."
Before the news of Jensen Huang's resignation broke, investors were already concerned about the huge debts incurred to fund the infrastructure for AI.
The yield on technology bonds has risen, and the credit default swap spreads have widened, especially among companies with lower ratings. A credit default swap is a type of contract in which investors pay a fee to be protected in case the borrower is unable to repay their debt. The widening of these spreads indicates that investors perceive a higher risk associated with these bonds.
On Friday, the yield on NVIDIA's bonds maturing in 2031 with a coupon rate of 4.5% was 5.77%, an increase of nearly 6% from the beginning of this week. Bond yields move in the opposite direction to bond prices.
On Thursday, tech stocks generally declined, with the Nasdaq 100 index closing down 0.3% as the market digested news regarding NVIDIA. The yield on bonds issued by ultra-large cloud service providers rose slightly on Thursday, indicating that broader concerns about the debt of AI continue to persist in the market.
Neocloud Disclosure
If NVIDIA makes any adjustments to the financing of AI, it is the smaller companies such as AI that may ultimately be affected. According to NVIDIA's latest quarterly financial report released in July, the company has $36 billion in off-balance-sheet cloud agreements, also known as backup support, with neoclouds.
CoreWeave, Nebius, and IREN – all of these neocloud companies are part of NVIDIA's portfolio. On Thursday, their stock prices fell significantly.
CoreWeave has always been a representative of AI's debt concerns. After the company announced its quarterly results on Tuesday, bond yields fell, alleviating investors' worries. On Friday, the yield for its bonds maturing in 2031 with a coupon rate of 9.75% was 14.75%, down from a level of 16.7% that was reached last week. The credit default swap spread for its five-year bonds also decreased by 18% so far this week, but it is still above 1000, which is generally considered a sign of pressure.
Analyst Andy Li stated that it is still unclear how NVIDIA's support for these companies will change in the future.
He said, "We don't know what strategy NVIDIA will ultimately adopt."
However, I believe that in terms of direction, considering Jensen Huang's crucial role in promoting NVIDIA's story and actively facilitating transactions, many of these creative transactions, revolving financings, as well as equity and credit support, are likely to become more modest.
CoreWeave CEO Michael Intrator told CNBC on Wednesday, before Jensen Huang's resignation, that NVIDIA "is not a single person."
In an interview with “Squawk on the Street”, he said: “There are thousands of people there who interact with thousands of our company’s employees every day. They integrate technically, in terms of physical infrastructure, and also on the network. For many years, they have been our excellent partners, and they will continue to be our excellent partners in the future.”
Explosive Options, the founder and chief strategist, believes that for now, there will be no significant changes in NVIDIA's importance or financing capabilities. He pointed out that as the chief financial officer, Kress was involved in these financing transactions, and it also takes time to find a permanent CEO.
The real question is how much funding the company is willing to allocate for AI financing, rather than using the tens of billions of dollars in free cash flow for other purposes such as share repurchases, capital expenditures, or mergers and acquisitions.
He said, "Gigants like NVIDIA and Meta hold all the chips in their hands. When they decide it's time to end the game, that really means it's over – for some of those smaller companies, it's like drawing the curtain on their existence."
— CNBC's Kif Leswing and Isabel O and Brien contributed to this report
