Nvidia's OpenAI Deal Raises Red Flags, But Hugging Face Acquisition Holds Key to Future Growth

Nvidia is at the center of two significant deals in the artificial intelligence (AI) infrastructure space, with one being widely reported and the other flying under the radar.

The well-known deal involves Nvidia's partnership with OpenAI, which has raised $110 billion at a pre-money valuation of $730 billion. In this arrangement, SoftBank and Nvidia each invested $30 billion, while Amazon committed $50 billion. This partnership includes a residual value guarantee for up to $105 billion from Nvidia to help finance OpenAI's infrastructure, with Nvidia being the exclusive compute supplier for OpenAI's data centers.

Nvidia CEO Jensen Huang described this arrangement as a way to lock in demand for Nvidia's compute, allowing OpenAI to build productive AI factories that can be upgraded repeatedly. However, some on Wall Street have expressed skepticism about the circular nature of this financing structure, with Nvidia helping one of its core customers finance the very buildings that will house Nvidia's hardware.

A more significant deal, however, is Nvidia's reported acquisition of Hugging Face for $12.9 billion. Hugging Face is a public library and developer workshop where open-source AI models are published and shared. By owning Hugging Face, Nvidia gains visibility into which models are winning in the market and can fine-tune its hardware and software accordingly.

Nvidia CFO Colette Kress stated that demand from frontier labs creates entirely new businesses and ecosystems for Nvidia, limiting the downside risk of the OpenAI financing arrangement. Nevertheless, some remain cautious about the supplier-customer relationship between Nvidia and OpenAI.