Summary of Key Points
Apple has regained its position as the world's largest company by market value, with a valuation of $4.95 trillion, while Nvidia's market value has dropped by nearly 5% to $4.77 trillion. This is not just a simple market fluctuation; it reflects a warning from the credit markets about the "money-burning" nature of AI infrastructure investments. Tech giants like Nvidia have bet billions on AI infrastructure through guarantees and revolving financing, leading to a surge in Credit Default Swaps (CDS) prices, indicating that the bond market believes their debt repayment risks have increased. Apple, on the other hand, has successfully avoided the high-investment pitfalls by adopting a low-asset strategy of renting computing power rather than building its own data centers, resulting in a rise in its stock price against the trend. The market is now more concerned about the credit risks of these companies (as reflected in CDS prices) rather than their short-term profitability (as indicated by EPS).
1. The Importance of CDS: More Than Just How Much Money Is Made
What are CDS? Simply put, they are a form of "insurance" for corporate debt—if a company fails to repay its loans, the insurance company pays out. Rising CDS prices signal that the market believes the company's default risk has increased.
Nvidia is one of the world's most profitable chip companies (with net profits of $120 billion in fiscal year 2026), but its five-year CDS price rose by 14 basis points to 82 basis points on Monday, meaning that insuring $10 million of Nvidia's debt would cost $82,000 per year. Societe Generale suggests focusing on CDS rather than EPS because the market is concerned not about whether Nvidia can make money but whether it can afford to continue investing in AI infrastructure, given that the profits might not be enough to cover the associated risks.
2. Nvidia's "Revolving Financing" Strategy: How Risky Is It?
Nvidia is taking a risky approach by guaranteeing $250 billion in financing for OpenAI (to help build its data centers) and discussing further funding for chip purchases, totaling over $750 billion in collaboration with SK Group. However, it only has $62.6 billion in cash, which is four times the amount of the guarantees it is providing! This practice, known as "credit packaging," allows Nvidia to use its credit to help unrated AI companies (like OpenAI) obtain cheap loans, and in turn, these companies buy Nvidia's chips, creating a cycle. Experts criticize this as a form of "financial alchemy," fearing that the lack of transparency in off-balance-sheet transactions could lead to a downgrade in Nvidia's credit rating. Even Michael Burry, the protagonist of "The Big Short," has shorted Nvidia, arguing that demand is driven by cycles rather than real end-user needs.
3. The Credit Crisis in AI Infrastructure: Many Companies Are Seeing Record CDS Levels
Nvidia is not alone in facing this crisis. Oracle's CDS price has risen to 215 basis points (up from 144 at the beginning of the year), and its credit rating has been downgraded by Standard & Poor's to BBB-, just one step below junk status, due to planned capital expenditures of $90-95 billion in 2027 and expected cash flows of -$42 billion. Google's situation is even more dire: its capital expenditures doubled to $44.9 billion in the second quarter, with free cash flow falling by $5.9 billion for the first time, and it plans to spend $195-205 billion on AI infrastructure this year, pushing its CDS prices to new highs. Meta's new data center financing costs are also at junk-level levels, raising concerns that these companies may overspend and fail to generate enough revenue to cover their expenses.
4. How Apple Is Winning: Avoiding the "Capital Expenditure Trap"
Apple, once criticized for underinvesting in AI, has become a winner in this context. It avoids building its own data centers and rents computing power, resulting in continuous declines in capital expenditures over the past three quarters. Its stock price has risen by 24% since 2026, while Nvidia's has only increased by 4%. Free market strategists point out that Apple has successfully avoided the "capital expenditure trap"—the situation where billions are invested in infrastructure with slow or no returns. The market now favors more conservative strategies, given the high cost of AI development and the uncertainty around when investments will pay off.
5. Five Key Signals to Watch
1. Apple's Quarterly Report on Thursday: We will look at its gross margin (to see if rising storage chip prices will erode profits), the growth rate of its service business (a key driver of its valuation), management's guidance for the fourth quarter, and Steve Jobs' statements before his resignation.
2. CDS Trends: Rising CDS prices for Nvidia, Oracle, and others could increase market panic; further upgrades in Oracle's CDS rating could lead to a downgrade by Moody's.
3. Nvidia's Financing Progress: If the $250 billion guarantee is finalized, doubts about its revolving financing will worsen; if it is scaled back or delayed, it may indicate a slowdown in AI infrastructure investment.
4. The South Korean Market: The decline in SK Hynix' stock price below its IPO level and Samsung's significant losses suggest that the performance of HBM4 chips may impact the real demand for AI chips.
5. Data Center Regulations: New restrictions in New York State on data center construction could influence the pace of AI infrastructure expansion across other states.
In summary, the "money-burning" competition in AI infrastructure is putting pressure on the credit market, but Apple's low-asset approach has become a benchmark for risk aversion. The market will now focus more on whether investments in AI are worthwhile rather than the quality of the related narratives.