Residual Value is All You Need
The key to accelerating frontier hardware adoption
Yesterday NVIDIA announced a $500B data center financing deal with a number of Tier 1 infrastructure investors. The thing that stood out most to me is one of the core mechanics of it:
“In some cases, NVIDIA may provide a residual-value support mechanism for up to 25% of an opportunity, assessed carefully on a project-by-project basis. That support is limited, residual-value based and designed to complement — not replace — independent underwriting.”
Why is this important? To keep it simple, it comes down to the operating expense of running these assets, specifically depreciation. Let’s use an example:
If a GPU costs $100, with a 5-year useful life and is depreciated to zero, the annual depreciation expense is $20. If I generate $100 of revenue per year with those GPUs against $30 of additional COGS (beyond depreciation), then my gross margin is $50, or 50%.
Now take an example where the GPU has $25 of residual value (e.g. I assume I can sell the GPU to someone for $25 after 5 years of use). In this case, my annual depreciation is $15 and total annual COGS are $45. All else equal, establishing a clear residual value increased my gross margins from 50% to 55%. Multiply this effect across trillions in projected AI infrastructure Capex, and residual value has a very meaningful role to play in future industry profitability.
We can apply the same logic to robotics. Right now, the dominant use case for robotics is in the automotive industry. This mass adoption has established clear and demonstrable residual value (e.g. a used market for 6-DOF robotic arms), which reduces depreciation expense for the asset owners. As a result, we’ve seen the industry drive mass adoption of these systems.
When we look at frontier robotics (humanoids, vertical solutions, etc.), we are still far from the ability to accurately forecast residual value. Do we know how much a farmer will pay for a used weed-killing robot? What about a humanoid that restocks inventory? Because of this lack of agreed-upon residual value, companies must either expense these items in-year, or depreciate them to zero.
For these reasons, simply reducing the Capex required for robotics adoption is insufficient to spur adoption. Because of depreciation, the (non-cash) operating cost of these assets remains high, even when accounting for labor replacement and increased utilization rates. Raising the residual value is likely a much longer lever and a far simpler fix than an industry-wide cost down or performance enhancement exercise. We think there’s a big opportunity for any company that can unblock this!