Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at Nvidia’s circular financing risks, Tether’s growing valuation, and the political risks facing pharma investors. 

But first, our number of the week…

$53 billion

That’s how much Chinese tech giant Alibaba plans to spend building out AI infrastructure over the next three years. Alibaba’s shares jumped on the news, climbing to a four-year high. 

Sidekick Takeaway: Alibaba’s spending plans show that big AI spending isn’t limited to just the US and Europe. As the race to build data centres and supercomputers heats up, firms may seek increased state support to keep up with competitors. 

Only have a minute to read? Here’s the TL;DR:

• Nvidia announced plans to invest up to $100 billion in OpenAI, highlighting the chipmaker's practice of investing in its own customers. This circular financing structure could potentially amplify both current industry growth and any future downturns.
• Stablecoin giant Tether is reportedly in talks for a fundraising round that could value the company at over $500 billion, rivaling SpaceX and OpenAI. The massive valuation reflects Tether's 99% profit margin plus expectations of continued regulatory acceptance.
• The Trump administration announced a link between autism spectrum disorder and Tylenol (paracetamol), causing shares in the medicine’s owner to drop 12%. Independent scientists say there is little evidence of such a link, highlighting the growing political risks facing the pharma industry. 

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

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House of Cards: Nvidia’s Circular Financing Risks

As one of the world’s most advanced chip designers, Nvidia is well-known as a leading AI supplier. 

Less well-appreciated, though, is Nvidia’s role as a leading AI investor. 

Nvidia has been one of the most prolific funders in the space, inking deals with firms like CoreWeave, xAI, and ElevenLabs. In 2024 alone, Nvidia participated in over 40 different AI-related venture deals. 

This week, the company announced its most significant deal by far. As part of a project to build sprawling data centre capacity, Nvidia plans to invest up to $100 billion in OpenAI.

At first glance, this mega-deal might seem to inspire continued bullishness in AI development.

But under the surface, the Nvidia-OpenAI tie-up could expose hidden risks plaguing the sector.

Investing in customers creates unique risks

The OpenAI deal highlights an unusual fact about Nvidia’s investments – many of the chipmaker's investments are in its own customers. 

That circular structure raises questions about the source of Nvidia’s profits:

• Nvidia’s investments are not considered expenses under traditional accounting standards, even though cash flows out of the firm. 
• However, any cash that is recycled back to Nvidia as chip purchases can be booked as revenue. 
• Through this cyclical process, Nvidia’s investments can potentially help the firm book growing profits in a way that may not reflect fundamental demand. 

To be sure, Nvidia is not a major shareholder in Big Tech firms like Alphabet and Meta, which remain some of the chipmaker’s largest customers. 

But this circular strategy does highlight a unique financing mechanism that could potentially amplify a small pullback into a larger slowdown in profits. 

Sidekick Takeaways: While it’s important to be aware of the risks of these types of financing arrangements, it’s also worth underscoring the potential benefits. By investing directly in leading AI firms, Nvidia can help the industry grow faster than it otherwise would, potentially creating genuine value both for the chipmaker and the broader sector.

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Brave New World: Tether’s $500 Billion Valuation 

Tether, the world’s largest stablecoin, has long had a tenuous relationship with the traditional financial industry.

Not only has Tether had several run-ins with regulators, but the company has struggled to get access to the US banking system and faced numerous questions about its portfolio holdings. 

After years in the wilderness, however, the tide is turning. Tether is increasingly gaining institutional legitimacy. 

As attitudes toward crypto have softened, Tether is now in talks for a major fundraising round that could make the stablecoin one of the largest private firms in the world.

Tether could be valued near OpenAI, SpaceX

According to early reports, Tether is in discussions with investors to raise as much as $20 billion.

Negotiations have floated a potential valuation of over $500 billion, a figure that could put Tether in the realm of companies like SpaceX and OpenAI: 

• A half-trillion-dollar valuation would put Tether many times ahead of the firm’s largest stablecoin competitor, Circle, currently valued at roughly $30 billion.
• Tether’s valuation partially reflects a business model in which the firm collects interest on portfolio holdings and pays nothing to tokenholders – executives have claimed to have a profit margin of 99%. 
• Investors are also betting that greater regulatory acceptance will help Tether continue to draw in assets, supported by network effects and a first-mover advantage. 

Tether already has roughly $173 billion in tokens outstanding, a figure that could be set to rise following novel stablecoin legislation in the US.

Sidekick Takeaway: Greater industry acceptance of stablecoins is no coincidence. In the US, officials have identified these tokens as a key source of additional Treasury demand as foreign investor purchases have waned, helping motivate regulatory efforts to formalise them. 

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Warning Labels: Pharma Investors Face Political Risk

Investing in pharma companies has always been risky. Regulatory trials for new drugs can make or break a firm’s fortunes overnight.

But as the political environment evolves, pharma investors have to ask themselves a new question: What happens when drug regulations are no longer based on science?

This week, the Trump administration announced the discovery of a link between autism spectrum disorder and Tylenol (paracetamol). The US president urged listeners not to take the medication. 

Independent scientists do not believe that there is sufficient evidence of a strong link between the two.

Nonetheless, Tylenol owner Kenvue’s shares dropped roughly 12% in the days following Trump’s announcement. 

Political risks could raise capital costs for pharma

While the politicisation of pharma might seem to be an American issue, the country’s dominance in drug development makes it a global one.

The US accounts for about 55% of total global investment in pharmaceutical research and development. 

Looking forward, the risk that the US government could declare certain medications unsafe with little scientific justification might raise financing costs for pharmaceutical firms. Investors will demand additional compensation for bearing new political risks.

And the impacts may extend beyond stock movements. The ultimate result could be higher development costs, longer approval timelines, and fewer breakthrough treatments reaching patients who need them.

Sidekick Takeaway: Doubtless, Kenvue will pursue legal avenues to try to get the Trump administration to reverse course. But it’s not clear they will be successful – drug regulators historically have wide latitude to warn the public over perceived health risks. 

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Notices

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern St, London, EC2A 3EJ.

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