Nvidia’s neocloud funding could drive significant revenue stream - Morgan Stanley

Nvidia recently unveiled a $500 billion funding initiative for AI infrastructure, partnering with major financial institutions such as Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR. This move has garnered mixed reactions on Wall Street, with some analysts viewing it as a "stunt" and others expressing concerns over the circular nature of AI deals.

Nvidia, however, claims that the initiative will allow compute resources to be treated as investable assets, with revenue sharing. Morgan Stanley, in particular, expressed optimism about the potential annuity revenue stream resulting from the partnership. Analysts led by Joseph Moore remain Nvidia's top semiconductor pick, highlighting the anticipated compute demand that would be supported by the initiative.

They believe that the new revenue streams from minority stakes in cloud service providers would enhance the predictability of earnings in the long term. The brokerage estimates that the four leading U.S. hyperscalers will add approximately 25 gigawatts of compute capacity by 2027, excluding Tensor Processing Units. If Nvidia captures 1/4th of the resulting neocloud ecosystem, which is projected to generate $500 billion in annual revenue, it could lead to a 60% upside in their FY28 EBIT estimates or a 25% increase in FY29 earnings without any change to Nvidia's initial sales. However, even at a smaller scale (2-5 gigawatts), Nvidia could still see a 10% uplift in EPS.