The P/E ratios have contracted and the CDS spreads have widened in all three cases, but Nvidia appears unscathed Credit-default swap spreads have widened across several major AI companies, but stock prices have reacted differently. Nvidia’s shares have held up, while Broadcom and Oracle’s have fallen sharply. Usually, when investors see CDS spreads widen, they assume the market is pricing in more credit risk.
It is hard to imagine Nvidia’s five-year CDS reflecting much credit risk, given how much revenue and earnings have grown in recent years and the stock’s resilience, but that is exactly what’s been happening. It isn’t just Nvidia NVDA. The same is happening at AMD AMD and Broadcom AVGO.
The trend extends to the so-called hyperscalers. For example, Oracle’s and Meta’s five-year CDS spreads have widened as well, even though Meta’s stock META sits just below its all-time high, while Oracle’s stock ORCL has fallen sharply. Why humanoid robots are so hard to mass-produce Play video: Why humanoid robots are so hard to mass-produce It is reasonable to think the market may be worried about companies like Oracle and Meta, given their surging capital expenditures in recent quarters and the potential pressure on free cash flow as spending shifts from the hyperscalers to the semiconductor companies.
But it also seems reasonable that if credit risk at the hyperscalers is climbing because of increased spending and shrinking free cash flow, the suppliers could be at risk too, given the chance that the hyperscalers may cut back at some point. Don’t Short Yourself offers weekly money tips to help you earn it, stack it and grow it. I would like to receive updates and special offers from Dow Jones and affiliates.
I can unsubscribe at any time. More interesting than why the spreads are widening is the disconnect between the stocks’ performance and the credit market’s assessment. One would expect a stock facing rising credit risk to see its valuation reset.
To some extent, that has happened. From June 2 through Oct. 8, Nvidia’s price-to-earnings ratio based on next-12-month estimates fell from about 21 to around 16, while its CDS spread widened from about 40 to 84 basis points. Yet the stock has held up.
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