The AI boom’s reliance on circular deals is raising fears of a bubble

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.

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.

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.

This article was originally published on NBCNews.com

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.

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.

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.

This article was originally published on NBCNews.com