The "Capital Cycle" in the AI Circle - The Story of NVIDIA and its "Favorite Son" CoreWeave

Against the backdrop of explosive growth in AI chip demand, NVIDIA has not only become a global giant in AI chip supply but has also quietly laid out a strategically significant investment. The latest IPO documents from cloud computing newcomer CoreWeave have revealed NVIDIA's other identity for the first time—“the second-largest customer of CoreWeave.”

The two parties have built a "parent-child relationship" through investments, supply, and reverse leasing, achieving the rapid rise of CoreWeave. As CoreWeave is set to go public with a valuation exceeding $30 billion, NVIDIA's $100 million investment from two years ago will increase tenfold, but this is just the beginning of the story.

“Project Osprey”: NVIDIA's Clever Strategic Layout

At the beginning of 2023, when giants like AWS, Microsoft Azure, and Google Cloud were scrambling for NVIDIA's AI chips, NVIDIA made a surprising decision in the market: to commit to paying CoreWeave $1.3 billion over four years to lease back the chips it produced. According to the IPO documents submitted by CoreWeave last week, the company named this deal “Project Osprey.”

This makes NVIDIA the second-largest customer of CoreWeave, after Microsoft, contributing 15% of its revenue last year, while the contract for NVIDIA to lease back its chips will last until August 2027.

NVIDIA's relationship with CoreWeave goes far beyond the surface. In addition, NVIDIA also invested $100 million in this startup during the same period and prioritized the supply of hundreds of thousands of high-end GPUs to it. Analysts believe that if CoreWeave indeed achieves “going public later this month with a valuation exceeding $30 billion,” then today, the value of this investment will exceed $1 billion.

This phenomenon of capital circulation is not uncommon in the AI industry. According to The Information, SoftBank is negotiating a large-scale investment with OpenAI while paying the latter $3 billion annually to use its AI software; Microsoft has invested over $13 billion in OpenAI, while OpenAI pays Microsoft billions of dollars annually for cloud services; Amazon and Google have also reached similar agreements with AI model company Anthropic.

Mutual Benefit: Gains for Both Parties and Future Challenges

Analysts believe that for NVIDIA, the collaboration with CoreWeave has multiple strategic significances:

• First, NVIDIA can rent CoreWeave's servers for internal R&D;

• Second, these servers also support NVIDIA's DGX cloud computing services;

• Most importantly, NVIDIA is concerned about over-reliance on large cloud service providers like AWS and Microsoft, which are developing their own AI chips, and hopes to cultivate new partners to expand the market.

It is worth noting that NVIDIA CEO Jensen Huang has also mentioned in a public statement a “new batch” of cloud service providers, specifically emphasizing, “ One of the notable ones is CoreWeave, and they are doing exceptionally well.” For CoreWeave, NVIDIA's support is key to its transformation. In 2021, the company's revenue was almost entirely derived from Ethereum mining. In September 2022, as cryptocurrency prices fell, CoreWeave shifted to visual effects rendering and AI business. Coinciding with the rise of ChatGPT, NVIDIA's commitment, along with Microsoft's order of over $4 billion, helped CoreWeave borrow $2.4 billion from investors like Blackstone to build more data centers.

In 2023, CoreWeave purchased $380 million worth of chips and hardware from NVIDIA, and this figure is expected to grow significantly this year. The company told investors last year that it expects to have about 240,000 NVIDIA chips by the end of 2024 and predicts that this number will double by the end of this year, including more H200 chips and over 100,000 of the latest Blackwell chips.

However, investors are pondering whether CoreWeave can continue to rely on these major clients, as contracts with Microsoft and NVIDIA are set to expire between 2027 and 2029, and these two companies contributed three-quarters of CoreWeave's sales last year. Meanwhile, CoreWeave is expanding through $8 billion in debt and $15 billion in long-term leases, urgently needing to attract new customers.

On Monday, CoreWeave announced a $11.9 billion five-year contract with OpenAI, which will help it increase revenue by about $2 billion annually and reduce its reliance on NVIDIA and Microsoft. Former tech executive CJ Gustafson stated:

“I have never seen any company grow so quickly while potentially truly disrupting its way of making money. However, substantial revenue can compensate for many shortcomings.”