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Published 20:10 IST, July 2nd 2024

Nvidia customer’s valuation voodoo tests AI mania

The Frankfurt-listed company has a knack for getting hold of Nvidia’s highly sought-after chips.

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Nvidia customer’s valuation voodoo tests AI mania
Nvidia customer’s valuation voodoo tests AI mania | Image: Unsplash

Chips down. Customers of Nvidia are trying to steal some of the Californian chip giant’s valuation magic. That’s one way to understand the news that Germany’s $1.4 billion Northern Data may re-list part of its business in the United States with a possible $10 billion to $16 billion target valuation, based on banker pitches as reported by Bloomberg. If investors go along with that price tag, it’s a sign that artificial intelligence mania has reached new heights.

The Frankfurt-listed company has a knack for getting hold of Nvidia’s highly sought-after chips, partly because of its history as a cryptocurrency miner. These days, the best way to monetise super powerful chips is not to perform calculations in return for bitcoin or ether, but to rent out the computing power to AI-hungry companies. Nothern Data’s new strategy, therefore, is to get its Taiga Cloud unit up to 75% of total revenue next year from 20% last year, while pushing crypto down to 20% of sales compared with 80% in 2023.

If that works, the company might hope for an AI-worthy multiple as a reward. Northern Data’s privately held U.S. peer CoreWeave, for example, recently secured a $19 billion valuation. It has about twice as many high-end Nvidia graphics processing units (GPUs) as the German group. The implied read-across may be that Northern Data’s relevant cloud unit alone should be worth just under $10 billion. The theory may be that a Nasdaq initial public offering for the AI bits of the group may help to juice that valuation even further.

There are several problems with that line of thinking. The first is that investors already implicitly attach a value for the divisions in question, and it’s nowhere near the mooted U.S. IPO price tag. Even after a roughly 20% surge on Tuesday following the Bloomberg report, Northern Data’s market value was about $1.7 billion. Berenberg analysts, which initiated their coverage of the stock in April with a “buy” rating, estimated that Taiga Cloud is worth about $2 billion, based on a discounted cash flow analysis. It’s unclear why that number should be so much higher purely by virtue of having a Nasdaq listing.

Another question is the sustainability of Northern Data’s unique edge, which consists of its access to Nvidia chips. Its AI pivot is enabled by the fact that it got access to thousands of Nvidia H100 Tensor Core GPUs last year, partly through the acquisition of a business called Damoon from stablecoin specialist Tether. That was a good deal, but investors might suspect it was a one-off. The two units that Northern Data may IPO will generate about $470 million of EBITDA in 2027, Berenberg analysts reckon. So a $16 billion enterprise value would imply a heady 34 times multiple. That sounds more like valuation voodoo than financial reality.

Updated 20:10 IST, July 2nd 2024