A spate of recent deals among AI’s biggest players has tightened the circle of companies and investments underpinning the technology’s explosive growth.
Nvidia plans to invest in OpenAI, which is buying cloud computing from Oracle, which is buying chips from Nvidia, which has a stake in CoreWeave, which is providing artificial intelligence infrastructure to OpenAI.
The AI boom that is revolutionizing how people live and work has become increasingly fueled by just a handful of companies turning to one another for the vast amounts of capital and computing power needed to drive their breakneck growth.
Some of those partnerships are worth up to hundreds of billions of dollars. Taken together, they have enormously increased the companies’ values, helping send U.S. stock indexes to new highs.
But as AI investing grows more insular, there is also a risk that the money flowing between these companies is creating a mirage of growth.
If the trend accelerates, some analysts warn, a weak link could threaten the viability of the whole industry — leaving an outsized mark on the U.S. economy.
“The experience of a quarter of a century ago [when the dot-com bubble burst] won’t necessarily be repeated, but the scale of recent investment increases by tech firms already indicates that they are taking significant risks,” analysts with Oxford Economics research group wrote in a recent note.
If it starts to become clear that AI productivity gains — and thus the return on investment — may be limited or delayed, “a sharp correction in tech stocks, with negative knock-ons for the real economy, would be very likely,” they wrote.
A web of deals
The latest example of that network of investments came Monday, when OpenAI — the maker of ChatGPT — announced a deal with artificial intelligence chipmaker Advanced Micro Devices, or AMD.
Under the terms of the OpenAI-AMD partnership, OpenAI will purchase AMD’s chips for an undisclosed sum in exchange for the right to take a stake of as much as 10% in the semiconductor giant.
The announcement came just weeks after Nvidia unveiled a deal under which it pledged to invest up to $100 billion in OpenAI.
“Excited to partner with AMD to use their chips to serve our users!” OpenAI CEO Sam Altman wrote on X. AMD and Nvidia are direct competitors.
An Nvidia spokesperson did not immediately respond to an inquiry about whether any OpenAI funds would be used to finance buying its competitor’s chips.
Nvidia CEO Jensen Huang has characterized his company’s $100 billion OpenAI investment as an opportunity to invest in the next “multitrillion-dollar” company.
Nvidia itself is part of that club, with a market valuation of $4.5 trillion.
Investments like Nvidia’s in OpenAI are predicated on “the confidence in the revenues” a company can sustain, Huang said on the “BG2” technology podcast.
Nvidia and OpenAI already have an indirect collaboration, through the cloud-computing darling CoreWeave, based in New Jersey, which has a standing agreement with OpenAI to sell Nvidia systems to OpenAI.
One of CoreWeave’s biggest investors? Nvidia.
There are other players in the thicket. Oracle has said it will spend about $40 billion on Nvidia’s chips to power one of OpenAI’s data centers.
Oracle and OpenAI are also collaborating with Japan’s SoftBank group on plans to spend $500 billion on additional data centers in a project known as Stargate.
Nvidia is a “core technology partner” to the Stargate deal. SoftBank owns a $3 billion stake in Nvidia.
An OpenAI representative referred NBC News to CFO Sarah Friar’s recent comments to CNBC, in which she discussed the company’s need for additional computing power. But she did not directly address the “circular” question.
Nvidia and CoreWeave declined to comment. Representatives for Oracle and SoftBank did not respond to requests for comment.
The doomsday scenario
To some investment advisers, the Nvidia-OpenAI deal is especially reminiscent of the ones announced in the lead-up to the 2000 dot-com bubble burst.
In March of that year, the tech-heavy Nasdaq Composite stock index fell by 77% and wiped out billions of dollars in market value.
It would take 15 more years before the Nasdaq returned to its March 2000 highs.
“There’s a healthy part and an unhealthy part” to the AI ecosystem, said Gil Luria, a managing director at D.A. Davidson financial group who covers technology.
The unhealthy part has become marked by “related-party transactions” like the ones involving these companies, he said, which can artificially prop up the value of the firms involved.
If investors decide the ties among the AI giants are getting too close, he said, “there will be some deflating activity.” That’s Wall Street-speak for a bubble’s bursting.
Altman recently sought to calm fears of a looming AI bust, suggesting that it was part of the life cycle of every industry.
“Between the ten years we’ve already been operating and the many decades ahead of us, there will be booms and busts,” Altman said last month during a tour of the massive data center complex that OpenAI is building in Abilene, Texas.
“People will over-invest and lose money, and underinvest and lose a lot of revenue,” he said.
So. Much. Money.
Concerns about AI’s insular web of deals and investments have been outweighed by the near-term potential for nearly unimaginable returns.
Rather than worry about whether AI is really growing at the pace it appears to be, many investors are instead focused on whether the companies can grow fast enough and make enough profit to justify the mammoth investments being poured into them.
“For this whole massive experiment to work without causing large losses, [OpenAI] and its peers now have got to generate huge revenues and profits to pay for all the obligations they are signing up for and at the same time provide a return to its investors,” wrote Peter Boockvar, chief investment officer of OnePoint BFG Wealth Partners and author of The Boock Report.
As long as tech-firm valuations keep soaring into the stratosphere and investors keep getting rich, the incentives remain for Wall Street to bless the boom and ignore the doomsday scenarios.
As of Wednesday, more than 35% of the market value of all the companies in the S&P 500 Index — more than $20 trillion — came from just seven tech companies, collectively known on Wall Street as the “Magnificent 7.”
And each of them — Apple, Google parent Alphabet, Amazon, Facebook parent Meta, Microsoft, Nvidia and Tesla — is heavily involved in AI projects.
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‘Very troubling’: AI’s self-investment spree sets off bubble alarms on Wall Street
The companies at the center of the artificial intelligence boom are investing billions of dollars in each other — and analysts say that the increasing entanglement is adding to risk of an AI bubble.
Nvidia (NVDA) in late September said it would invest up to $100 billion in OpenAI (OPAI.PVT) as part of a partnership for the ChatGPT maker to use Nvidia’s chips to train and run its next generation of models.
This is just one of a flurry of deals among a tight web of Big Tech players that have been made public in the last few months. There’s also Nvidia’s $6.3 billion deal with AI data center firm CoreWeave (CRWV), a customer of the chipmaker in which it holds a 7% equity stake. There’s Nvidia’s reported $2 billion investment linked to its customer xAI (XAAI.PVT). Then there’s OpenAI’s own deals with Oracle (ORCL), CoreWeave (CRWV), and chipmaker Advanced Micro Devices (AMD). And on Monday, the ChatGPT maker tapped Broadcom (AVGO) to build its first in-house AI processors.
Wall Street analysts say the agreements highlight a growing trend: AI infrastructure providers, led by Nvidia, are investing in their customers, who then turn around and buy more of the infrastructure providers’ products. In other cases, customers of infrastructure like OpenAI are investing in their suppliers.
Analysts interviewed by Yahoo Finance said there are two major concerns with the circular dynamic seen in the recent spree of AI investments. For one, the nature of the transactions could make it seem like there’s greater demand for AI than there really is. It also drives a closer link among the valuations of Big Tech companies — especially given that their respective stocks have soared on news of such deals — and intertwines their fates so that a hit to any one company would be bad news for the entire ecosystem, the experts said.
“The latest developments are very troubling,” said tech analyst and Bokeh Capital Partners chief investment officer Kim Forrest. “Vendors [of AI infrastructure] have gotten a lot of money, so they’re just shoving money back into their customers that may be poorly spent.”
Cornell professor Karan Girotra said instances of vendors and customers financially supporting one another reduce the “resilience” of the overall system: “If something goes wrong, then the effect flows through the system rather than [being] isolated.”
Legendary short seller Jim Chanos, famous for predicting the fall of Enron during the dot-com bust, also weighed in, writing in a post on X last week, “[Don’t] you think it’s a bit odd that when the narrative is ‘demand for compute is infinite’, the sellers keep subsidizing the buyers?”
The clearest examples of why such circular investments can be risky emerged during the dot-com bubble of the late 1990s and early 2000s. As the internet boomed, internet service providers (ISPs) rushed into the market of providing networks and access to the internet but quickly found themselves cash-constrained.
In moves similar to the recent spate of AI deals, suppliers of equipment — routers, switches, fiber-optic cables, and other hardware needed to make consumer internet a mass product — invested in the ISPs, their customers, by extending loans and taking equity stakes in those firms. The ISPs could then use the loans and equity financing to buy routers or cables from the equipment companies — transactions referred to as vendor financing.
On paper, business was booming, and the deals were huge. Between 1999 and 2001, equipment vendors such as Cisco Systems (CSCO), Nortel Networks, and Lucent extended billions in loans to internet providers and telecom carriers.
Because the ISPs were so heavily backed by the equipment companies but had such weak underlying financials, when capital dried up, dozens of internet providers went bust. With no one to pay off their loans, the equipment vendors were forced to write off the debt.
As the industry spiraled and the dot-com bubble burst, the bad investments vendors made in their own customers deepened the impacts of their crashes. Between March 2000 and the end of 2002, the tech-heavy Nasdaq Composite (^IXIC) fell more than 70% — a loss equivalent to more than $3 trillion, per Bloomberg data.
The parallels aren’t exactly the same. For one, major tech companies today have higher profit margins and have mostly funded their AI-related capital expenditures with strong internal cash flows rather than debt — but analysts say that could change as companies level up. One of the leading figures of the AI boom, Oracle, raised $18 billion in debt late last month.
Today’s critics worry that the entangled web of AI investments leaves the system too reliant on the success of OpenAI in particular. The ChatGPT maker has yet to turn a profit, and analysts worry what will happen if the company doesn’t live up to its revenue forecasts.
“[OpenAI CEO Sam Altman] has the power to crash the global economy for a decade or take us all to the promised land, and right now we don’t know which is in the cards,” wrote Bernstein analyst Stacy Rasgon in an Oct. 6 note.
And some of the latest deals are particularly concerning, DA Davidson analyst Gil Luria told Yahoo Finance, because AI companies like OpenAI and CoreWeave have taken on more debt or announced intentions to do so while receiving investments from Nvidia.
“They’re using that capital to raise debt,” he said, “It’s the levering up that’s the truly unhealthy behavior.”
Epistrophy Capital Research chief market strategist Cory Johnson also said such arrangements are a signal of an unhealthy ecosystem: “If your customer has to borrow money to buy your product, your customer’s not a good customer.”
To be sure, circular investments have existed since the inception of the AI market. Microsoft (MSFT) helped seed OpenAI with $19 billion worth of investments between 2019 and the present, while Amazon (AMZN) invested $8 billion in AI upstart Anthropic across two separate investments in 2024.
Some on Wall Street argue that such partnerships in the AI market are a good thing because they allow the necessary capital to support the AI infrastructure buildout to be deployed faster, potentially accelerating the path to a return on Big Tech’s massive investments.
“I could argue that there’s no better use of Nvidia’s cash right now,” Bernstein’s Rasgon said in an interview, speaking of its investments in its own customers.
“I don’t think we’re anywhere close to bubble territory,” he added.
When Nvidia CEO Jensen Huang was asked on a podcast recently about claims that deals like Nvidia’s investment in OpenAI — which spends billions as a Nvidia customer — look similar to the faulty deals of the dotcom bubble, he argued that OpenAI’s revenues and any investments the AI company receives are separate matters.
“[OpenAI] is likely going to be the next multitrillion-dollar hyperscale company, and who doesn’t want to be an investor in that?” Huang said. “My only regret is that they invited us to invest early on, and we were so poor that we didn’t invest when I should have given them all my money.”
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