A tangled web of deals stokes AI bubble fears in Silicon Valley

At OpenAI’s DevDay event This week, OpenAI boss Sam Altman did what American tech bosses rarely do these days: actually answered reporters’ questions.

“I know it’s tempting to write the bubble story,” Mr. Altman told me as he sat with his top lieutenants. “There are actually a lot of parts of AI that I think are a little bit bubbly right now.”

The debate in Silicon Valley over whether AI companies are overvalued has taken on new urgency.

Skeptics privately (some now publicly) ask whether the rapid rise in value of AI technology companies is, at least in part, the result of what they call “financial engineering.”

In other words, there are fears that these companies are overvalued.

Mr. Altman said he expects investors to make some bad decisions and stupid start-ups to walk away with crazy money.

But with OpenAI, he told me, “there’s something real going on here.”

Not everyone is convinced.

Recently, artificial intelligence bubble warnings have come from the Bank of England and the International Monetary Fund. JP Morgan boss Jamie Dimon speaking to the BBC “The level of uncertainty must be higher in most people’s minds.”

And here, in what is often considered the tech capital of the world, concerns are mounting.

At a panel discussion this week at the Silicon Valley Computer History Museum, early AI entrepreneur Jerry Kaplan told a packed audience about his encounter with four bubbles.

He’s particularly concerned, given the sheer amount of money on the table compared to the dot-com boom. There’s more to lose.

“When [the bubble] “The breaks are going to be really bad, and not just for people in AI,” he said.

“It will drag down the rest of the economy.”

However, Prof Anat Admati of the Stanford Graduate School of Business, which has its share of tech entrepreneurs, says that although there have been many attempts to model the situation while in a bubble, it may be an exercise in futility.

“It is very difficult to time a bubble,” Prof Admati told me. “And you definitely can’t tell you’re in the bubble until it bursts.”

However, the data concerns many people.

Artificial intelligence related businesses We have created 80% Striking gains in the American stock market this year, Gartner predicts Global spending on artificial intelligence It will likely reach $1.5 trillion (£1.1 trillion) before the end of 2025.

OpenAI, which brought AI to the consumer mainstream with ChatGPT in 2022, is at the center of the complex web of deals examined.

Last month, for example, it signed a $100 billion deal with chipmaker Nvidia, itself the world’s most valuable publicly traded company.

This expands on the existing investment Nvidia already has in Mr. Altman’s company, with the expectation that OpenAI will build data centers powered by Nvidia’s advanced chips.

Then on Monday, OpenAI announced plans to buy billions of dollars worth of equipment to develop artificial intelligence from Nvidia rival AMD; This deal could make it one of AMD’s largest shareholders.

Remember this is a private company recently worth half a trillion dollars.

There is also technology giant Microsoft making major investments, and cloud computing giant Oracle also has a $300 billion deal with OpenAI.

OpenAIs Stargate project Financed with help from Oracle and Japanese conglomerate SoftBank and announced at the White House during President Donald Trump’s first week in office, the Abilene, Texas, home base is getting bigger every few months.

As for Nvidia, it has a stake in AI startup CoreWeave, which is handling some of OpenAI’s big infrastructure needs.

As these increasingly complex financing arrangements become more common, experts in Silicon Valley say they may be clouding perceptions of AI demand.

Some people are also outspoken on this issue, calling deals where a company invests in or lends money to its own customers so they can keep buying as “round financing” or even “seller financing.”

“Yes, investment loans are unprecedented,” Mr. Altman told me Monday.

But he added: “It’s also unprecedented for companies to grow revenue this quickly.”

OpenAI’s revenue has been growing rapidly but has never turned a profit.

And it doesn’t bode well when people I talk to keep talking about Canadian telecom equipment maker Nortel, which borrowed heavily to help finance deals for its customers (and thus artificially increase demand for its products).

Nvidia’s Jensen Huang defended his deal with OpenAI on CNBC on Monday, saying the company didn’t need to buy its technology with the money it invested.

“They can use it to do anything they want,” Huang said.

“There is no such thing as privilege. Our primary goal is to truly support them, help them grow and grow the ecosystem.”

Mr Kaplan says he saw There are several signs that the AI ​​industry, and thus the broader economy, may be in trouble.

In frothy times, he says, companies announce big initiatives and product plans for which they don’t yet have the capital.

Meanwhile, retail investors are clamoring to get in on the start-up action.

The rise in AMD shares this week may indicate that investors are trying to get a piece of the ChatGPT wealth machine; While all this is going on, actual physical infrastructure is being built, aimed at satisfying the seemingly insatiable hunger for further AI development.

“We are creating a new man-made ecological disaster: massive data centers in remote places like deserts will corrode and leak bad stuff into the environment, leaving no one to hold accountable because the builders and investors will be long gone,” Mr. Kaplan said.

But even if we are in a bubble, the hope from Silicon Valley is that investments will no longer go to waste.

“What’s comforting to me is that the internet was built on the ashes of yesterday’s overinvestment in telecom infrastructure,” said Jeff Boudier, who develops products at the AI ​​community hub Hugging Face.

“If there is excessive investment in infrastructure for AI workloads, there may be associated financial risks,” he said.

“But this will enable many great new products and experiences, including ones we haven’t considered today.”

There are many people who believe in the potential of artificial intelligence to transform society.

The question is: The industry’s leading companies may be running out of money to finance their ambitions.

“Nvidia appears to be the lender or investor of last resort,” said Rihard Jarc, who founded the UncoverAlpha newsletter.

“Who else has the capacity to invest $100 billion in another company right now?”