Nvidia: Reported OpenAI Deal Raises Circular Deal Fears, but We Think the Stock Is Undervalued

Key Morningstar Metrics for Nvidia

• Fair Value Estimate
  : USD 280.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Very High

The Wall Street Journal reported that Nvidia NVDA is in discussions to provide a roughly USD 250 billion backstop for OpenAI as part of a massive data center project in Ohio. The report suggests that the backstop will allow OpenAI, still a privately owned startup, to receive better financing terms.

Why it matters: Nvidia’s shares fell about 5% on July 27, presumably on the news, as it might be stoking investor fears about circular deals, reminiscent of the dotcom bust in the early 2000s.

• We continue to believe investors should properly be aware of such deals, but we don’t view the report as a sign that AI demand is a mirage. AI token usage continues to rise exponentially, while AI hosting companies appear to be computing constrained.

The bottom line: We maintain our USD 280 fair value estimate for wide-moat Nvidia, and shares continue to appear undervalued to us.

• Given the high likelihood of strong AI capital expenditures in the near term and medium term (and likely the long term too), we believe Nvidia’s growth prospects are underrated.
• AMD’s recent boost to its server CPU market forecast suggests to us that agentic AI is in high demand and that much more AI infrastructure will be required over the next few years.

Between the lines: Our understanding is that Nvidia is providing backstops to some neoclouds, enabling them to receive better financing terms for buildouts in exchange for sharing some of their AI hosting revenue with Nvidia. Sharon AI and Firmus are two such deals for Nvidia.

• A similar OpenAI deal would be much larger and more prominent, but in our view, is squarely in line with Nvidia’s broader strategy of seeding and developing the AI ecosystem for all players.
• This should allow Nvidia to sell more AI gear, and more AI usage (from chatbots to agentic AI and, eventually, physical AI) is ultimately good for Nvidia over time.