The AI Deals Raising Fears of a New Tech Bubble

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1:50Bloomberg Audio Studios. Podcasts. Radio. News. This week, two of the biggest players in the AI industry struck a deal. OpenAI, which owns ChatGPT, agreed to use tens of billions of dollars worth of AI chips over multiple years from Advanced Micro Devices, or AMD. And AMD set the stage for OpenAI to become one of its largest shareholders. It speaks to the commitments that some of these AI infrastructure companies are making with OpenAI to facilitate this AI boom that's happening. Emily Forgash is a tech reporter at Bloomberg. The CEO of AMD and then the president of OpenAI were both on Bloomberg, and they both spoke about how this is a win-win for each other.

2:37This deal is a win for AMD, it's a win for OpenAI, and it's a win for our shareholders. We really think of this as an industry-wide effort. If OpenAI wins, that's a win for AMD because AMD's chips will be used for part of the inferencing, and vice versa when AMD does well, now OpenAI has a stake in that company. If this arrangement sounds a bit circular to you, that's because it is. An AI chipmaker and an AI developer making a multi-billion dollar bet on each other. It's not the only deal OpenAI has brokered recently with a major AI chipmaker. The circular nature has kind of come to attention in recent weeks because of the scale, the size, the frequency of these deals.

3:21Part of it was tipped off in large part by NVIDIA's up to$100 billion investment in OpenAI. OpenAI and AMD. OpenAI and NVIDIA. There's a lot of AI on AI investment going on right now. OpenAI has a$300 billion deal with Oracle to compute on Oracle's cloud network space. NVIDIA and CoreWeave, another cloud provider, also has a relationship. NVIDIA bought$6.3 billion of cloud services from CoreWeave. OpenAI also has a deal with CoreWeave to pay as much as$22.4 billion for that compute space as well. OpenAI and AMD had the deal. That happened on Monday, obviously. AI companies say these kinds of large, reciprocal, and sometimes overlapping deals are what's needed to meet growing demand for their tech.

4:10But as more and more money gets invested in the space, these unorthodox business arrangements are also raising flags for industry analysts, who are starting to wonder, is the trillion-dollar AI market being propped up by the industry itself? The circular financing concern comes hand-in-hand with concerns over an AI bubble. And so when you're putting that much money into an industry that hasn't returned on those investments at this point in time, you could worry that if it never returns on those investments or if there's never turning a profit, then the whole thing will kind of combust.

4:48I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, why a network of circular AI deals is fueling concerns about the possibility of a bubble, and what could happen if it pops.

5:06Over the last few months, there's been a frenzy of deal-making in the AI space. Everyone's talking about AI. Everyone's talking about also this deal between OpenAI and AMD. Adding fuel to the AI frenzy. The deal expected to generate tens of billions of dollars in new revenue. A historic collaboration as part of the deal. Intel is going to use NVIDIA graphic technology and upcoming PC chips. Emily Forgash, who covers tech for Bloomberg, has been covering these deals closely. And she says a lot of them have involved two dominant AI companies. The center of the web is definitely NVIDIA and OpenAI.

5:42NVIDIA designs chips that power AI systems, and OpenAI develops AI and AI-driven products like ChatGPT. In September, just two weeks before OpenAI announced its deal with AMD, OpenAI and NVIDIA announced a partnership of their own. NVIDIA agreed to invest as much as$100 billion in OpenAI to build data centers. And OpenAI agreed to fill those sites with millions of NVIDIA chips. Emily says in some ways, the deal just made good business sense. Part of that is just the position that NVIDIA has found itself in. It's the wealthiest company in the entire world, the biggest company in the entire world, and it has dominance in chips.

6:25But it also raised eyebrows among industry analysts. The circular nature of investing in a company like OpenAI, which then needs compute capacity, which could ultimately use NVIDIA's chips in the end and give back to NVIDIA in that way, that's kind of more recently becoming a concern. It's not necessarily planned to be circular, but analysts have pointed out the fact that when you froth up a market like this, it could lead to a bubble. And the original sin of this bubble could have been like circular financing. The industry has seen a number of other circular financing deals recently. between OpenAI and Oracle, NVIDIA and CoreWeave, OpenAI and CoreWeave, OpenAI and AMD, and NVIDIA has also made investments in smaller AI companies.

7:15NVIDIA doesn't just invest hundreds of billions of dollars into the biggest companies like OpenAI. It also has been funding a lot of AI startups, in large part to push AI innovation forward, with the thinking that if you invest in these smaller AI startups and kind of give them a boost, then they'll ultimately get somewhere. Maybe not somewhere as big as OpenAI, but maybe somewhere close. Why are OpenAI and NVIDIA at the center of so many of these deals? Part of the reason NVIDIA can put its hands in so many places is because it has so much money to do so. But also, as I mentioned before, NVIDIA is the dominant chip maker in the U.S.

7:49and it's competing for that title globally as well. So most of the high-level AI capacity comes from NVIDIA's advanced chips. OpenAI was just very much ahead of the curve. It has more than 700 million weekly users now of ChatGPT. It's just becoming so well-known and so used. It's almost gotten like verb status. The way that we say, oh, I'm just going to Google that. And by that, we mean we're going to search on the internet. Now I'm kind of hearing people say, I'm just going to ChatGPT that rather than being like, I'm going to search on an LLM or I'm going to search through one of these chatbots.

8:24It's ChatGPT that they go to. And so that kind of global dominance that both companies have and the amount of money that they both are dealing with at this point in time, OpenAI just reached a$500 billion valuation. Those two are making it kind of ultimately the center of this web. But does OpenAI have the revenue to support these kinds of deals? From my understanding, when I chat GPT something, that's free. OpenAI does have high revenue, but it also burns cash. It's not a profitable company at this point in time. That is one of the key concerns of this circular financing leading to an AI bubble because companies are just putting so much money into not just OpenAI, but the other companies that OpenAI surrounds itself with.

9:08And it's just kind of propping up the entire AI sector. There's$100 billion from NVIDIA and OpenAI. There's$300 billion with OpenAI and Oracle. There's as much as$22 billion between OpenAI and CoreWeave. And those continue to grow. And then if you think about how much those companies are also then spending on compute, spending on chips, the numbers are just staggering in terms of how much money they're giving to each other. And so the concern is that all this money is going in, but none of it will ever come back out because there will never be a profit. And that's the key concern here, that a complex, interconnected web of investments are artificially inflating valuations of these AI companies before they actually make any money.

9:51Is this something that would normally concern regulators or is this just how the industry works? In other words, does it just make sense for AI companies to partner with other AI companies because their goals are aligned or is there something else going on here? So whether or not regulars get involved is to be seen. But at this point in time, it's not necessarily shady by any means. It's more so just that these companies have so much money. NVIDIA, for example, has so much money because of its chip dominance. And it has an interest in propelling the AI innovation around the world forward. I think that would kind of be the argument for why the deals are kind of happening this way.

10:31Although they're super new, this kind of way of financing. These AI companies are using equity, debt, investing in one another, investing huge tons of money in one another. So it's kind of like since AI is rapidly advancing and there's a huge stake in doing so, these companies are just pouring in the money as much as they can to propel that forward. So they're using all the tools in their toolbox, including investing in each other. Yes, yes. Coming up, what happens if the AI boom becomes the AI bust?

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13:02Hey, everyone. It's Emily Simpson and Shane Simpson from the Legally Brunette podcast. Each week, we're bringing you true crime through a legal lens. Whether you want all the facts on the disappearance of Nancy Guthrie, or you still need to wrap your head around the ditty verdict, we're breaking it all down step by step. And we're not just lawyers. We're also husband and wife. It makes for some pretty entertaining episodes. Listen to Legally Brunette on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

13:36Frenzied investments in new startups, rapid growth, frothy valuations. Bloomberg tech reporter Emily Forgash says what's happening in the AI space right now is reminding some people of another bygone tech era. I think a lot of the industry analysts that were around during the dot-com boom especially are seeing parallels that are concerning. The dot-com boom. That moment in the late 90s when everyone was eager to invest in anything internet related. And people just poured in money, so much money into these companies, any company that was kind of involved in developing the internet at that point in time.

14:13And so when the return on investment just wasn't there, it all came crashing down. And that's kind of the worry that we have here. The difference here, though, is some people would argue like there are actual products here. They're being adopted by so many enterprises and businesses and just consumers in their everyday life that the bet that people are making on AI might have a bit of a stronger foundation. But the question then is, well, where is your profit to back up all of these huge investments? And the other difference with this moment is that AI companies are spending a lot more than dot-com startups were, right?

14:46Absolutely. Each chip is tens of thousands of dollars, each chip. And the compute that the world is using at this point in time is not just a few chips. It's lots and lots and lots of chips. And so this is not a cheap endeavor by any means. Also, the data centers are massive. They also cost so much money to build and to then fill with the chips. That all means that a potential AI bubble could be a lot bigger than the dot-com bubble. And as more money pours into the industry from more corners of the economy, the stakes of that bubble bursting get bigger too. BlackRock is an advanced talks to buy a data center company called Align Data Centers with a valuation of$40 billion.

15:28dollars. This is kind of a 40 billion dollar bet that BlackRock is placing on a data center company that only has like around 600 megawatts of live capacity at this point. They have a lot that's planned. They have a lot in construction. That's all coming. But that takes a lot of time. Also, the U.S. government is involved to a certain extent. The U.S. took a stake in Intel, which is another chip provider, a 10 percent stake in Intel using Chips Act funding. NVIDIA also now invests$5 billion in Intel, and they're planning to co-develop chips together. So that's kind of a narrative of two rivals becoming partners to kind of boost this AI boom.

16:04And then also, the U.S. is taking a 15 % of cut of NVIDIA and AMD's chip sales to China. So just in those three last examples, you can see how the U.S. government is like somewhat involved also. How much of the rest of the economy is being propped up by AI right now? If the AI bubble bursts, what would it mean for the rest of us? Well, the market is propped up by these companies, for sure. It's propping up the New York Stock Exchange, other exchanges. And so if those companies were just all of a sudden dip, even a little bit, you'll see the effects of that in the stock market. Anytime NVIDIA dips, that's a huge whole market moving event.

16:40Yeah, absolutely. You don't necessarily have to care about AI or the future of open AI or the future of NVIDIA even to care about this story, because this has reached into so many other markets, the financial markets, equity markets, debt markets, real estate markets, because data centers are real places that need to be built. Also, your energy bills might be higher if you live next to a data center. So this extends far beyond now at this point, the AI sector. If some of this valuation is froth, what metrics can we look at to get a true sense of how the AI economy is performing right now and how these companies are really doing?

17:15Open AI is a private company, and it does share some information about its financials, but that's kind of where it's a little bit tricky because even its valuation is a little bit hard to nail down because there's valuations during funding rounds and then there's valuations during stock sales. A company like NVIDIA, though, Public, reports a lot about their finances. I think that if NVIDIA were to post declining revenue for some reason in the coming quarters, people might then look back to this circular financing idea and be like, is this really paying off in this moment? Is this a short term pain that will pay off in the future?

17:48But these are kind of questions that we won't yet know the answers to. And I think that's what's a little bit nerve wracking sometimes for investors. It's a big question with billions of dollars riding on it. Will the bet on AI pay off or will it break the system? Analysts are definitely saying that these big AI companies, their capacity for innovation, their capacity to return on investment, they could be leading the whole economy towards a huge boom in AI, a huge boom in money, a huge boom in even further investments, or it could go the other way. Yes, Stacey Rasgen with Bernstein Research wrote that Sam Altman, the CEO of OpenAI, has the power to crash the global economy for a decade or take us all to the promised land.

18:33And right now we don't know which is in the cards. Everyone's looking towards OpenAI at this moment. It's kind of like the bellwether for the situation with the AI boom. If it continues to innovate and if it can turn a profit and become a profitable company, that might make all this investment so worth it. But at the same time, if it's not able to generate profit quickly enough, and if the innovation doesn't continue, then all this investment that's kind of circulated around OpenAI or near OpenAI, adjacent to OpenAI, that will all see the negative consequences. It's very hard to detect a bubble ahead of the bubble.

19:08But given that only 25 years ago there was a huge dot-com crash, people are certainly more aware of how it could ultimately come crashing down if the profit returns don't actually manifest.

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19:55Hey, everyone. It's Emily Simpson and Shane Simpson from the Legally Brunette podcast. Each week, we're bringing you true crime through a legal lens. Whether you want all the facts on the disappearance of Nancy Guthrie, or you still need to wrap your head around the ditty verdict, we're breaking it all down step by step. And we're not just lawyers, we're also husband and wife. It makes for some pretty entertaining episodes. Listen to Legally Brunette on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made.

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