After the initial shock and awe of Nvidia's pledge to invest $100 billion in OpenAI, Wall Street stock analysts are debating what it all means. Bulls say it's more evidence of the booming artificial intelligence infrastructure business. But bears say it is just Nvidia aiding a cash-starved customer.
"Overall, the narrative remains bullish," Daniel O'Regan, Mizuho Securities managing director of equity trading, said in a client note. "But there are many trying to say the latest move by NVDA is simply vendor financing and circular in nature."
Nvidia announced Monday a strategic partnership with OpenAI. Under the deal, OpenAI intends to procure at least 10 gigawatts of AI data centers running Nvidia processors. Nvidia will invest in OpenAI progressively as each gigawatt of capacity is deployed.
Investment research firm Vital Knowledge weighed the bull and bear arguments for the deal in a report.
"What bulls are saying about the news: this is the latest headline underscoring the gushers of money washing over the AI space as a slew of massive companies race to deploy unprecedented amounts of computing infrastructure," the firm said.
"What bears are saying about the news: this is nothing more than Nvidia paying to prop up one of its biggest and most prominent customers, providing OpenAI with cash that in turn makes a round-trip back to Nvidia to purchase chips," Vital Knowledge said.
Nvidia Stock Pulls Back
On the stock market today, Nvidia stock slid 2.8% to close at 178.43. On Monday, Nvidia stock jumped 3.9% to close at 183.61.
DA Davidson analyst Gil Luria kept his buy rating and 210 price target on Nvidia stock after the OpenAI announcement. However, in a client note, he expressed concern that Nvidia has become the "investor of last resort," bailing out OpenAI's overextended commitments. He noted that Nvidia previously had to bail out the CoreWeave initial public offering.
Elsewhere on Wall Street, Evercore ISI analyst Mark Lipacis raised his price target on Nvidia stock to 225 from 214 and reiterated his outperform rating.
Meanwhile, Nvidia's pact with OpenAI raises competitive risks for rival AI chipmakers AMD and Broadcom, BofA Securities analyst Vivek Arya said in a client note.
OpenAI Deal Called Good Investment
Nvidia could generate $300 billion to $500 billion in revenue from its $100 billion investment in OpenAI, Arya said.
"The optics of such large investment in a customer will raise questions until Nvidia clarifies the appropriate accounting treatment," he said. Arya rates Nvidia stock as buy with a price target of 235.
Arya believes the OpenAI deal is a good investment for Nvidia, which has limited options to deploy its free cash flow.
Mizuho trading-desk analyst Jordan Klein also thinks the deal is a good use of Nvidia's cash. Nvidia is using money generated from its biggest customers including Alphabet's Google, Amazon, Meta Platforms and Microsoft to fund a competitor in OpenAI, he said.
"If you are Nvidia and generating mountains of annual free cash flows (like $100 billion-plus per year) in the coming next few years, what are you going to do with all that cash?," Klein said in a client note. "You cannot realistically buyback enough stock. You cannot hire enough software and semi engineers. You cannot really make large-scale acquisitions either due to need for China and U.S. regulatory approvals that will not come easily. Why not invest in partnerships with key customers who need capital and want lots of your product? That is just strategically a smart move."
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