Big AI’s Circular Deals Spark Fears of an Economic Bubble

Bassyonni

ago 17 hours

Big AI’s Circular Deals Spark Fears of an Economic Bubble

Nvidia’s recent $100 billion investment in OpenAI has ignited discussions about the potential for an economic bubble in the technology sector. CEO Jensen Huang hails this funding as a pivotal moment for the emergence of a “multitrillion-dollar” company as Nvidia already boasts a market valuation of $4.5 trillion.

Nvidia’s Strategic Moves and Collaborations

Nvidia collaborates with OpenAI primarily through its partnership with CoreWeave, a cloud computing company based in New Jersey. CoreWeave sells Nvidia systems to OpenAI and counts Nvidia among its major investors. Furthermore, Oracle has earmarked approximately $40 billion to procure Nvidia’s chips for OpenAI’s data center operations, indicating a strong commitment to expanding AI infrastructure.

Global Investments and Collaborations

Oracle, alongside OpenAI, has partnered with Japan’s SoftBank Group to launch the Stargate project, which involves spending $500 billion on additional data centers. With SoftBank holding a $3 billion stake in Nvidia, the interconnected financial relationships between these entities raise concerns about transparency and influence. An OpenAI spokesperson directed inquiries to CFO Sarah Friar, who has highlighted the organization’s increasing need for computing power, yet stopped short of addressing the intricate interrelations between these companies.

Concerns About Economic Stability

Investment advisors are drawing parallels between current market dynamics and the dot-com bubble of the early 2000s. Gil Luria from D.A. Davidson financial group noted that “related-party transactions” within the AI sector could artificially inflate the value of the companies involved. If investors perceive that the connections among AI giants are too entwined, a pullback in market enthusiasm is likely.

In March 2000, the Nasdaq Composite index plummeted 77%, erasing billions in market value.
It took 15 years for the Nasdaq to recover to its previous heights.

Ongoing Economic Experimentation and Investment Returns

Sam Altman from OpenAI addressed concerns about potential AI market downturns, acknowledging that economic cycles include periods of growth and decline. He observed that the tech industry might face turbulent times as investors navigate booms and busts in this evolving landscape.

Despite apprehensions about the sustainability of AI investments, many are more focused on the immediate high returns that these ventures could yield. Investors are keen to see whether OpenAI and its peers can generate significant revenues to justify massive investments.

Tech Giants’ Market Dominance

As of now, seven tech companies, referred to as the “Magnificent 7,” dominate the S&P 500 Index. Their collective market value exceeds $20 trillion, exceeding 35% of the index’s total value. Companies like Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla are heavily invested in AI, highlighting the industry’s crucial role in future economic stability.

While the tech sector continues to thrive, the pressure on these companies to generate revenue amid interconnected investments raises questions about the inevitability of a market correction.