Is AI’s Circular Financing Inflating a Bubble?

The companies at the center of the AI boom have been busy investing billions of dollars in each other. I'm sure you've seen the spaghetti diagrams in the media recently showing how companies like OpenAI are investing in their chip suppliers or how chip manufacturers like Nvidia are investing in their customers, enabling them to buy more chips. I first noticed how strange these deals were back in March when Coreweave, a company who buys chips from Nvidia, puts them in data centers, and rents out compute, filed to go public. Its IPO perspectives revealed that Nvidia owned about 5% of the company.

When investor interest seemed tepid after a long IPO drought, Nvidia offered to anchor the deal at $40 a share with a $250 million order. Bryce Elder described the deal in the FT at the time as an oruraorus, an ancient symbol of a snake or a dragon eating its own tail. A similar metaphor might be an extension cord plugged into itself. If you don't know much about electricity, that might look like a perpetual energy machine, but trust me, I've tried it out and no matter how you configure it, it won't power your home appliances.

You just need outside energy to get things going. That roughly speaking is the current state of AI infrastructure financing. While the sheer number and size of these deals have convinced some investors that the AI value chain is developing rapidly, others are concerned by the circularity. Two companies sit near the center of nearly every diagram.

Open AAI and Nvidia. Each is likely trying to ensure that everyone in the ecosystem from suppliers to customers to cloud providers has a vested interest in their success. Open AAI recently announced a $300 billion cloud infrastructure agreement with Oracle, a $10 billion custom chip partnership with Broadcom, and strategic alliances with major memory suppliers. According to UBS analysts, OpenAI's memory commitments alone account for half of the world's current capacity.

Nvidia, meanwhile, pledged up to a hundred billion dollars in investment to Open AI, who will, in turn, buy millions of Nvidia's AI graphics cards. AMD is also in on the game. Open AAI agreed to buy tens of billions of dollars worth of AMD chips. And in return, AMD gave Open AAI the right to buy 10% of its stock for 1 cent per share, contingent on AMD hitting ...