Nvidia Invests $2 Billion in Nebius for New Data Center Deal

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All right, I listen on the Bloomberg Mobile app.

Good right, I have the Black app, so I'm always listening to Bloomberg Radio on that. When you do, you'll hear stories about Nvidia, undoubtedly every single day, as it's the largest company in the world. It's investing, to today's story, two billion dollars in Nebious. It's a new data center deal. Nebbius obviously is one of those neo cloud companies. And

But what does it get them.

I mean things are changing in terms of the ecosystem and the partnerships that these companies had. Remember in Vidio plan to spend almost one hundred billion dollars with open Ai at one point, so they scale that back to thirty billion in their latest funding round.

Oh guess what.

They are investing a lot more in neoclouds, whether it's cor Viv or Nebus. Now, basically from an Invidia standpoint, they want more fragmentation. They don't want that cloud world to be limited to three hyperscalers. They want as much

Does this deal, this two billion dollar investment, put NEBS on the map? I mean, is this you know, game changer for that neocloud company?

Absolutely? Right now it is all about raising the funds, which we heard from Oracle last night. They're not going to the band market anymore. And that's why you saw a positive reaction. So the market is very sensitive about raising more debt to finance the infrastructure build out, and that's why Oracle saw such a big pushback. I'm sure it's the same for core Weave as well.

And so if.

Nebus is getting two billion dollars from in Vidia, and you can say it's circular financing to buy in Vidia chips, but it alleviates that need to go to the bard market to raise a two billion dollars And so from that perspective, it does solve that problem that you know, they don't have to raise money right away.

I mean, they're only one of two neo cloud companies anyone's ever heard of, right, No one knows core Weave. Yeah, beyond core Weave and nebbyus, what is.

There there are there are you probably know all me and Scarlett core Weave and then and that's number one, and Nebyus is the also ran right with by the way, way to the average cost of capital at Nebus twenty percent.

There you go.

So, yes, they don't want to have to go out and raise money.

They'd rather have a chip maker give them money to buy that chip maker's chips.

Yes, that's what they cost her to a financing. And that's what has some people concerned.

I mean, why doesn't in Vidia just its own neo cloud company.

They are, they do have a DGX cloud offering. But look, in this case, Nvidia has new architectures every twelve months.

They have already announced their Ruben architecture.

So what they want is these neo clouds to have those new chips first, as opposed to an Amazon or a Microsoft. And that serves them well because these new clouds will end up signing up customers which will be long term customers, and that I think it's great for Nvidia to have that fragmentation.

Can I I'm gonna throw an audible here if you don't mind, because we were going to talk about uber zooks, but I mean it.

Doesn't matter in the context of Invidia.

I mean, they're cool looking little things, but I don't care. What I care more about is this chip battle.

Right.

We knew Nvidia completely and totally dominated, still does I'm guessing.

Google has a chip that's like a contender.

Amazon has Trainium, and I thought that Meta had just like you know, not joined the party. But now they just showed up, Right, that's breaking news this morning at ten o'clock. What's Meta deploying?

And look, that's the big risk for an Nvidia is all these hyperscalers don't want to spend you know, thirty forty billion dollars a year on buying Nvidia chips, so that's where they will continuously try and develop their own chips. Now, Meta is way behind at Google TPU. Google TPU is still you know, deployed. They have seven versions of their chips.

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Through the big gainer and the stock that everyone's paying attention to right now is Oracle biggest performer, biggest gainer, I should say in the S and P five hundred best performer up more than ten percent. And in fact, this looks like the best day for Oracle if it closes at these levels, biggest rally since it announced that three hundred billion dollar open aideal. Let's bring in on rag Rana. He is our go to guy in all things tech because he is our tech analyst here a

You know, I think when you go back and see when when Microsoft and Amazon and Google reported, they all talked about increasing capics and that spooked investors out. And I mean, I guess Oracle had the foresight to say that, Listen, we added a lot more backlock to our you know, balance sheet, but we're not raising capex. I think that's the big difference right now. That's what the market is less.

So it's relief that it did not say it's full your outlook.

Yeah. Yeah.

And the other thing you have to say is when you look at their press release, they talked about two things. One was for the customers coming in, they're going to ask them to prepay some of that stuff or they're going to ask them to bring their own GPUs because it just shows them being a little bit more disciplined on the fin out side.

Do you bundle them into the other big guys or are they a separate bolt and almost to meg seven.

It was a bolt on for the cloud providers a few years ago, but in the last two years, the orders that they're getting from open Ai has really catapulting them into the biggest category.

People go to Oracle, what's their distinction versus going to the forty seven others.

Well, the thing is there are only three big ones, the Amazon, Microsoft and Google. Frankly, the Oracle only is another one that has the capital to come up with a cloud infrastructure at par with some of the others.

However, you look at what Oracle's results also showed, which is that cash flow is going to remain negative for the next few years. And this is a company that's definitely looking at its expense line. You mentioned how some cloud customers will pay for their own ships, so they're being more discerning in that regard. But they've also are making plans, according to our reporting, to cut thousands of jobs too. How much fat can they cut right now?

That's a very good question because when you look at their gross margin declined quite a bit, but their operating margin or they adjusted operating margin, was only down one percent, which is basically that they cut so much in sales and marketing and general and administrative expenses to offset some of that pressure.

But you're right, they cannot do that forever.

They really need to get scale in and see the benefits of these cloud contracts in order to offset that.

I mean, I know you don't talk to Robert Schiffman, you're not in speaking terms, but it just put out a blistering note on Salesforce and their bond deal and rag Rana. On a given thirty forty billion dollar cash call, they make four phone calls, maybe five, They bring it in three four times over subscribe. Does this party just keep on going for the man seven.

The question is for how long? I mean, I think that's the big concern. But when we talk about Oracle, for example, their bounty was oversubscribed, but now they have to go in the market and raise equity also because one of the things they have said is they don't want to get rid of their investment grade ratings. So I think this is where a lot of the relief is coming for for some of the investors, that they're going to have a much more balanced approach on raising to.

Finally be adults instead of being pri Madonna's. You were up at Buffalo years ago, read about these pri Ma Donnas out on the West coast, and now they're finally growing up right.

Well, that's because the investors aren't behaving differently than they were before. I mean, when last year we saw Microsoft raising capecks, everybody was liking it. But just a month a month and a half ago, when they talked about raising capecks, all the cloud providers fell down. So that's a lesson for the next one. Come in and say, I don't want to get that message.

Can I do an audible always?

What in God's name do you read?

I mean how do you keep up on this?

When I was a kid, the old man would say in a stupid read this article in MIT Technology Review because he really covered a cover.

What do you read to keep up?

Tom?

It's very hard nowadays.

I think the podcast recently where Satya is speaking, or you know, when when the Google CEO is speaking, those are the ones you really have to follow because the text speed of the innovation is just so fast that you know anything.

From six months ago. I mean it's just antique.

And of course you're listening to these podcasts at double or triple times the speed. I'm sure when Satya talks, when the CEO Satya in Adella of Microsoft, when Satya talks.

How do I just love Mark busting her check?

How much does he really reveal or is it in what he does not say that you get your your most insightful thoughts on what's next?

I think I really look for him to figured out how much is he going to spend more? Because at the end of the day, he is not somebody who benefits from buying in video chips. I mean, he's the one who's funding a lot of this expansion with you know, let's say, according to our calculations, he's spending in a year fifty to sixty billion dollars just on in video GPUs.

That's a very big amount.

So if he's doing it for the reason, I have to see that there is some AUTOAI to that.

So I'm at Palladino's down at Grand Central Station at the Bourbon Bar with Joseph. He's just like old school bartender. He's like, he's not a mad manner something like. Somebody comes up to me and they go, do they really not let man deep sing an Anna rug run in the same room? Do you guys when you're at seven thirty when lexing dinner? Are you too allowed to speak now that we sit next to each other? Absolutely?

Really?

Yeah, Okay, I just the guy came up to me and I said, I really don't know. I mean, there's just so much you know, Scarlet, there's just so much voltage there.

There's a lot of voltage there. And we tend to have them both on but at separate times because we've got to make sure that we sprinkle their expertise throughout the hours.

Yeah. Well, also there's the security issues as well. How many players are there going to be in five years?

See on the hyperskate cloud providers. We know of the top three for sure, it's Amazon, Microsoft neck to neck, then Google, then Oracle. Then you have the new cloud providers that's Core, Weave and Nevius.

So these are the.

Five I watched most closely right now because they have the capital, They are the ones with the leading chips right now, and they are the ones everybody is going through to build their applications or run their infrints or training workloads.

Anright, you were saying that Oracle has made clear that it wants and maintain its investment grade credit rating, and of course there were some concerns about that, and that's why we saw the CDs the credit to fault swaps climb in recent weeks, although it's come back down a little bit.

Here.

How convinced are you that they can do that?

Yeah, And I talk to Rob Schifman all the time as well, so here I are on the same page that they're very careful about that investment gate rating and whenever they come up with the bond deal it gets covered up very quickly.

How much does that to equity investors?

I mean it does matter because you know you don't want to be financially irresponsible for a company like this that houses one of the most important software products, their database business, that is really the cash cow for them that can allow them to expand. What we saw last night was the expansion is going to be there, but maybe with a little bit more more measured means rather than going you know, all in.

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All right, let's go to another one of our talented analysts, Herman Chan. He is our senior analyst covering US banks and Herman, there's a big headline today that got everyone's attention, JP Morgan marking down the value of some private credit loans, mainly to software companies, in the latest sign of stress in private credit. I guess it's not a surprise if you recall that Jamie Diamond, the CEO, had talked about the possibility of more cockroaches.

That's right, So we view this as a prude and risk management measure by JP Morgan. Basically, by reducing the value of these loans, it means like the private credit companies can borrow less from JP Morgan, so it reduces their exposure in the case that there's some more volatility ahead for the private credit folks.

So to me, what was the most interesting about this news was not that JP Morgan marked some of these credits down or some of these assets down, rather but

Exactly like open enrollment. Right, that's insane.

Is that a reason that we see so many of these private credit assets going from like ninety seven to zero.

It just goes to show that JP Morgan is the big kahoona and they can dictate credit terms, whereas others may not have the same capacity. So having those advantageous credit terms helps them protect themselves in the event that we have potential loss We've seen headlines of and expectations and predictions of fifteen percent potential losses in the credit software books for these private credit companies. So I think banks will continue to try to get ahead of it.

So the backstory here, if we take a step back, is that these Wall Street banks like a JP Morgan are not making a lot of private loans directly because they de risked following the Great Financial Crisis. Regulators were breathing down their necks. But they are exposed indirectly because they lend to private credit funds. Do we have a sense, herman or is this still kind of something vague of just how exposed Wall Street banks are to private credit funds.

Yeah, we have some data that the Federal Reserve puts out every quarter and we calculate it. So it's about for the banks that I cover, it's about fifteen to twenty percent of their total loan portfolio is to non bank financial institutions, which private credit is a subset of. So it's a growing piece of the banking industries pie and it's really last year was the sole growth driver

So you say that JP Morgan's book there grew what seven or eight per seventy eight seventy eight percent, that's a massive growth. Are there other banks that also grew those loan portfolios massively and maybe are more reluctant to mark them down.

It's across the board, right, so Wells Fargo was particularly aggressive in the fourth quarter. The banks that have larger markets businesses like a JP, like a b of A, like a city have grown much faster than some of the regionals, but the regionals have also participated as well.

Yeah, I think about the headline just last month about Bank of America committing twenty five billion dollars of its own cash to private credit deals. In that instance, it's making those loans directly as opposed to indirectly through private credit funds.

Right, That's right.

So that's there is a bit of a regulatory arbitrage, as I mentioned before, where you have to hold less capital when you lend to private equity or at private capital versus doing the loan.

Does you feel like, I don't know, two thousand and seven, when different firms were trying to get in on subprime mortgage after the boom of the growth had already been seen, and there's a little bit of FOMO driving.

Activity leading the witness, it does feel like, not in.

A quarterable we are feeling a bit of froth in the markets. We're we're seeing some stress, but.

We have it.

We're not at that level where we think things are seizing up at this point, and private credit as a whole, the the industry is about one point seven trillion dollars, so it's it could be fairly absorbed within the industry. You know, you have a bank's like JP Morgan, BFA, Wells Fargo City themselves, their entire balance sheets over a trillion dollars, So.

Not two thousand and seven, but maybe, like I don't know, two thousand and six.

Well, I mean, the question is what's the fallout?

Right, I know it's only one point seven trillion, and frankly software is probably less than thirty percent of that, so you're talking about five hundred billion, max. But the question is what kind of fallout do you have because a lot of these banks don't have the kind of direct lending approach that Scarlet's talking about BFA. Rather, they'd lend money to the BDC and then the BDC rented out.

And then those BDCs, when they're looking.

At everybody headed for the gates, sell off their best assets first so that they can say we got ninety seven cents on the dollar, and then they're left with bad bank holdings.

Right.

Yeah, So you do have that phenomenon where where companies, like you've seen it from from some BDCs and the direct lenders, where they're selling the assets that they can sell now. So it remains to be seeing what's still remaining on the one of the books, how the credit performances and you know, you have to put on your credit lens of probability of default and loss given default, and how that shakes out.

So we're still waiting.

This is more At this point, A and client and investor are a bit more skittish on the performance going forward, but we haven't really yet seen that performance sour. So this is like early endings of the credit private credit story in our view.

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Matt Miller here at seven thirty one Lex filling in for Paul Sweeney and Scarlet's rushed off to do our weekly deal show Every Wednesday at noon on Bloomberg Television. We have a show focused completely on M and A Scarlett and Danny Berger, my co host on on Bloomberg

So let's get over to it.

Bloomberg Intelligence analyst Diana Roseero painas she.

Covers this sector for.

US and Diana, what's the story at Campbell's. I guess it makes sense that they're focused not as much on chicken soup but more on potato chips.

Yes, and basically this company is suffering from what the industry as a whole it has been suffering in terms of, you know, volumes do not seem to be growing, pricing, it's still elevated. Consumers are being very strategic with their spending. They're moving to private label, they're you know, curving their expenditure on things, for example, snacks and chips, which was one of the biggest you know, disappointments in the quarter for Campbell's.

By the way, private label products.

Not to take us on too much of a tangent here, but when I was a kid, we said generic products right the store brand.

But they've really picked up in popularity.

It seems like consumers feel almost more sophisticated when they, you know, save twenty five thirty cents buying the private label product.

Yes, for sure, And not only that, retailers have invested in their private label portfolio. They've entered different tiers in terms of private label. So you have the cheaper versions, you have the medium you know price, and then the high end and that actually brings people into the store and definitely builds loyalty for the retail.

All inside private label. Right.

Kirkland is the one at Costco. I go to shop right, they have bowl and basket and you can buy just the ground level bowl and basket product, or you can buy their super fancy organic bowl and basket exactly product. All right, all right, back to Campbell's, the Campbell's company, because I want to zero in on the pricing issue. A real concern about the impact of this war has

So what do they do here?

Yeah, that is the question that it keeps avoiding this these types of companies equally with the you know, not only oil prices being so high at the point spiking in such a rapid pace, you also have the conflict itself, you know, in the strait of harm I believe it's called, and that obviously is going to affect supply chains, uh for for these companies. So uh, they seem they want to be a little bit more strategic in in lowering prices.

So you will probably see.

For the remainder of the year more hit on gross margin or a bit margin, you know, for Campbell's, because they're investing more on marketing rather than you know, just a race to the bottom on pricing.

Yeah, more fertilizer, by the way, travels through the Strait of horror moves on the way to international markets than hydrocarbons. So it's more about moving fertilizer than oil. Obviously, oil is the product we pay more closely attention to as consumers, most of us by gas, fewer of us by fertilizer. But one third of the global fertilizer trade passes through the strait of horror moves. It's massive, and of course

Yes exactly.

I mean, even if the disruption delays, you know, let's say ninety days, that is probably going to have a significant headwind to cogs for these companies. The problem is is that usually when disruptions like this happen, you will have the ability to increase prices to match that disruption, and that usually will take about twelve months.

Now they're probably.

Talking about a large and longer time to get those prices back because you know, already the consumer is stopped.

Out what Campbell's soup stock, by the way, or the Campbell's Company, sorry I keep forgetting they change their name.

The Campbell's Company. And they're serious about that.

I got a note actually to the principle when I said it wrong. Once Campbell's company stock down over the last five years fifty two percent, They've lost half of the value of their company. At what point is it cheap enough for investors to go in and pick it up?

Well, I will say.

When volumes start to at least normalize, which we could probably see more on the like.

That would be a more of a four.

Q story, fiscal four Q story in the beginning of fiscal twenty twenty seven. So those are I think that will be the main point, in the main driver of any any appreciation.

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