This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Key Points
- OpenAI, the maker of ChatGPT, enters into a major (but non-binding) partnership with Nvidia.
- This deal should be a win-win for both companies.
Nvidia (NASDAQ: NVDA) is no stranger to investing in its customers. The company has put billions to work to expand the artificial intelligence (AI) ecosystem, aiming for more growth and investment from its core growth market. The company's latest deal with OpenAI -- the maker of ChatGPT -- is a prime example of this strategy.
Here's what the deal between Nvidia and OpenAI means
The first thing to understand about this deal is that it is simply a letter of intent. That means the partnership is non-binding, with no legal obligation for either of the companies to follow through on the deal framework discussed below. Even if the deal is non-binding, however, the spirit of the partnership is clear: Nvidia and OpenAI will be working closely together to enable each other's businesses.
Next, let's discuss the figures you may have seen in the headlines. Nvidia, for example, has pledged to invest $100 billion into OpenAI. The details, however, paint a slightly different picture than the headlines. What the deal essentially outlines is OpenAI's intention to purchase Nvidia hardware for a massive, multiyear infrastructure buildout. According to a press release, OpenAI intends to "build and deploy at least 10 gigawatts of AI data centers with NVIDIA systems representing millions of GPUs for OpenAI's next-generation AI infrastructure." In return, Nvidia will invest in OpenAI equity in tranches, with each funding tranche being initiated as the infrastructure gradually expands.
OpenAI gets two things from this partnership. First, it gets funding in the form of direct cash for equity. Second, it gets preferential treatment from Nvidia when it comes to technology sourcing. Nvidia's chips are in high demand, at one point facing 12-month shipping delays. OpenAI has now secured a long-term strategic advantage, gaining the ability to scale its infrastructure with the best chips on the planet, chips that the competition may not be able to source.
Nvidia, meanwhile, gains an even stronger backlog. It locks in a huge customer for years to come. It also helps fund an accelerated buildout of AI infrastructure -- another long-term tailwind for its business.
Should you buy even more Nvidia stock?
This is the type of deal that only Nvidia and OpenAI could pull off. Both are industry heavyweights with sizable competitive advantages. By joining forces, both companies stand to gain even more ground on the competition.
Should you buy stock in Nvidia due to this deal alone? Probably not. The deal, as mentioned, is simply a signal of intent. Nothing is legally binding. Plus, the tie-up could draw the scrutiny of regulators. According to Reuters:
The scale of Nvidia's latest commitment could attract antitrust scrutiny. The Justice Department and Federal Trade Commission reached a deal in mid-2024 that cleared the way for potential probes into the roles of Microsoft, OpenAI and Nvidia in the AI industry. However, the Trump administration has so far taken a lighter approach to competition issues than the Biden administration.
Even if there are changes to the deal due to regulators or external influences, investors should be very bullish simply about Nvidia's ability to forge such a deal. It has a huge lead on the competition when it comes to real-world chip performance, access to capital, and industry influence. By making moves like this, the company is ensuring that its dominant market shares have the possibility of continuing far into the future. So while shares aren't a buy simply due to the deal with OpenAI, investors should take this news as a strong positive for Nvidia's future.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
