NVDA's Hugging Face acquisition aims to manage excess compute and protect 71% data center margins; however, a market shift to enterprise computing or deductive models threatens margin expansion.

Nvidia up 3.7% today,

Nvidia's stock is likely to rise today because of this nearly completed $14 billion acquisition of Higginface . It's an acquisition deal worth approximately $12.9 billion, plus about $1 billion to retain employees.

Many believe that all of this may be related to what Sam just said about Nvidia's acquisition of "Higginface" and the "Neo" cloud issue. Well, first we have to remember that Nvidia has 15-year lease commitments for some data centers or some computing capabilities that it is trying to offload to third parties.

The pessimistic view of Nvidia's acquisition of "Higginface" is that they have too much computing power that they just acquired, and perhaps too much computing power is being built up , so Nvidia is stepping in to absorb this excess.

One of the companies they bought or promised to buy excess computing from is "CoreWave," and they told them: "Let us know if you need us to buy your excess computing." And they did.

"Yes, we have excess computing that we cannot get rid of," said Korwef. Nvidia, you said you would guarantee it and that you would buy it . Here it is. Buy it.

And now, Nvidia says: "Great." "We just wanted to sell chips ." "Now we have computing that we don't really need ." What if we bought a company that needed computing? Hmm. Welcome to "Higging Face".

There are pessimistic views that suggest – in a misleadingly simplistic way – that Nvidia can now exploit its control over "Hugging Face" to steer model adoption towards CUDA technology or Nvidia processors, and perhaps support those processors through the data center contracts it has obtained.

In other words, you are facing a complete cycle. Perhaps it is a pessimistic view , but perhaps this is exactly why Nvidia is seeking to acquire "Hugging Face".

But this is where Nvidia's rejection of the 227 level again today becomes interesting, because many are saying, "Well, Nvidia wins either way." Nvidia wins in leading computing, and Nvidia wins in enterprise computing.

Is this correct ? Well, this is also where things get a little vague .

Look, if you actually look and analyze the graphics revenue , that's exactly where Nvidia says the graphics segment includes graphics processing units for gaming and enterprise workstations.

So, Blackwell 6000, 5090 , and anything else. That falls under the graphics sector. Graphics revenue is analyzed here in comparison with data center and computing network revenue.

We can compare that to their operating income for those sectors, and we can deduce the profit margins for those sectors.

We see that Nvidia's data centers are achieving an operating income margin of 71%, and this clearly explains why Nvidia wants to sell more data center chips, and perhaps why they want to buy " Hugging Face" to support the "Neo" cloud and ensure the continuation of those contracts, because they want to continue selling chips under this high margin. A very good margin indeed.

Meanwhile, the operating profit margin on the graphics side, i.e., games, AI workstations and enterprises, is only 49.2% . It's still very good, but it's a small fraction of 71%.

I mean, to be fair, an operating income of around 50% is still very good. It's only well below 71%, and when Nvidia anticipates even a 1% decrease in gross profit margins, people panic and the stock drops.

Therefore, margins are very important to Nvidia.

If it shifts to enterprise computing, Nvidia is likely to experience even greater weakness in its profit margins in the future if it moves away from large data centers and towards enterprise computing.

This is not profitable for Nvidia's margins. This hurts Nvidia's profit margins.

But in the long run, Nvidia's profit margins will also be affected if the market shifts towards deductive business models.