Nvidia Builds Moats in Open-Source AI and Supply Chain Lockups

Nvidia's stock has been underperforming this year due to a lack of a compelling narrative, but according to HSBC analyst Frank Lee, the company is quietly building two hidden moats that could drive a re-rating. The first is its aggressive push into open-source small language models (SLMs), positioning itself as the world's largest open-source AI contributor.

Nvidia's SLMs offer significant advantages in inference cost and throughput, making them a preferred choice for intelligent agents and edge applications. With its comprehensive product portfolio covering multiple core scenarios, including reasoning and language tasks, physical AI for robotics and vision, and autonomous driving, Nvidia is well-positioned to expand its customer base from hyperscalers to millions of developers and sovereign nations.

The second narrative is Nvidia's strategic locking of critical supply capacity across advanced packaging, memory, optical components, and energy infrastructure through multi-year agreements in 2026. This includes a $500 billion partnership with SK Group, pre-booking over 60% of TSMC's CoWoS-L packaging capacity, and cumulative payment obligations to SB Energy capped at $105 billion.

HSBC believes these two narratives could become key catalysts driving a valuation re-rating for Nvidia. The company's growth engine is evolving from a single structure dependent on hyperscale customers toward a broader, more resilient customer ecosystem.