NVIDIA Corporation (NASDAQ:NVDA) and Broadcom Inc. (NASDAQ:AVGO), two of the world’s largest chipmakers, are tapping debt and private capital markets to fund the AI infrastructure boom. These massive financial commitments coming from some of the biggest names in the market signal exceptionally-strong AI compute demand. However, one Wall Street firm, Wolfe Research, believes the same structures that they are creating could also pave way for longer-term risks.
Nvidia: $500 Billion Financing Push Could Unlock Massive AI Revenue
On August 10, Nvidia announced that it has signed memorandums of understanding with Apollo Global Management, Blackstone, BlackRock, Brookfield Asset Management, Goldman Sachs and KKR to establish financing platforms for Nvidia’s customers. The AI chipmaker is leveraging institutional credit, insurance funds and private capital to underwrite GPUs and data centers, securing funds without having to tap on its own balance sheet.
According to Wolfe, if Nvidia manages to capture about 70% of spending in a Nvidia-powered data center, the deployment may translate into approximately $350 billion of Nvidia revenue. While the agreement helps Nvidia tap on funds without using its own capital, it not completely isolated from the risk. According to CEO Jensen Huang, the company has the option to backstop up to $125 billion, or 25% of the potential deals.
Broadcom: 20GW AI Platform Expands the Opportunity
Broadcom has been brewing a similar strategy around its custom AI accelerators. Back in June, the company announced a partnership with private-equity duo Apollo Global Management and Blackstone for a $35 billion institutional financing initiative.
The company said it will establish an AI XPV Platform with Apollo (NYSE:APO) and Blackstone’s (NYSE: BX) Credit & Insurance Business as initial anchor investors to enable more than 20 gigawatts in compute capacity using Broadcom’s XPUs and networking solutions. These solutions will be customized for leading frontier AI labs, including Anthropic and OpenAI, through 2028.
As per Wolfe Research, the 20GW of XPV financing would amount to 14GW of capacity for OpenAI and Anthropic in 2028. At $10-15 billion per GW, it could imply about $140-200 billion in revenue from the two. This is compared to the $245 billion of total consensus revenue for Broadcom in 2028.
However, there is one caveat. The company is also backing an initial $30 billion in residual-value guarantees (RVGs) and credit support on senior A1 and A2 notes. This ties Broadcom’s long-term credit and market risk directly to the AI infrastructure boom.
Wolfe Sees Longer Term Risks
The AI infrastructure industry isn’t facing imminent oversupply right now, but what if it does? This is exactly what Wolfe Research is afraid of.
Right now, Nvidia’s six-year old Ampere platform remains fully utilized with resilient token pricing. Token costs and occupancy rates for legacy hardware have remained high despite new hardware becoming available.
However, backstops and residual-value guarantees assume risk tied to the future value of AI infrastructure. By acting as a safety net for customer infrastcture spending, they are inherently creating contingent liabilities that may become detrimental if the AI sector faces overcapacity.
The firm doesn’t expect supply to exceed demand soon due to physical constraints in creating clean room capacity. Their analysis implies that both TSMC and DRAM supply will likely remain tight through 2028.
Wolfe’s concerns do not necessarily highlight that the AI spending cycle is about to collapse. It simply explains how the nature of exposure for technology companies is now evolving based on their financial endeavours.
Insider Monkey’s Database
According to Insider Monkey’s database, 275 hedge funds held stake in the stock at the end of the first quarter, up from 264 in the prior quarter. In contrast, hedge funds slightly reduced their stake in Broadcom at the end of the first quarter, down to 173 from 202. Nevertheless, hedge fund positioning points to strong institutional conviction in both names despite the small drop in Broadcom.
As of July 31, 1.26% of Nvidia’s float was sold short, down 9.69% from the prior reporting period. For Broadcom, short interest was around 1.31% of float, down almost 11%.
Overall, the picture looks positive, with Nvidia and Broadcom’s financing push the key to unlock another way of AI infrastructure spending. However, backing parts of the financing themselves means both companies are taking on more risk in the case AI capacity eventually outruns demand.
While we acknowledge the risk and potential of NVDA and AVGO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than NVDA and AVGO and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: SpaceX (SPCX) and Northrop Grumman (NOC) Clear Golden Dome Test: Who Has More to Gain? and Nvidia (NVDA) Is Going Beyond GPUs in the $500 Billion AI Boom, Wells Fargo Says
Disclosure: None. Follow Insider Monkey on Google News.
Hedge Fund Resource Center