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

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

“I know it’s tempting to write the story of the bubble,” Mr. Altman told me as he sat alongside his top lieutenants. “Actually, there are many aspects of AI that I think are pretty bubbly right now.”

In Silicon Valley, the debate over the overvaluation of AI companies takes on new urgency.

Skeptics wonder privately – and some now publicly – whether the rapid rise in the value of AI technology companies may be, at least in part, the result of what they call “financial engineering.”

In other words, there is concern that these companies are overvalued.

Mr. Altman said he expected investors to make bad choices and stupid start-ups to walk away with crazy money.

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

Not everyone is convinced.

In recent days, warnings of an AI bubble have come from the Bank of England, the International Monetary Fund, as well as JP Morgan boss Jamie Dimon told the BBC “the level of uncertainty should be higher in most people’s minds.”

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

At a panel discussion at the Computer History Museum in Silicon Valley this week, one of the first AI entrepreneurs, Jerry Kaplan, told a packed audience that he had lived through four bubbles.

He’s especially worried now, given the scale of money put on the table compared to the dot-com boom. There is so much more to lose.

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

“This will weigh on the rest of the economy.”

However, at the Stanford Graduate School of Business, which has attracted its share of tech entrepreneurs, Professor Anat Admati says that while there have been many attempts at modeling while we are in the bubble, it may prove an exercise in futility.

“It’s very difficult to time a bubble,” Professor Admati told me. “And you can’t say for sure that you were there before the bubble burst.”

But the data is very worrying.

AI-related companies represented 80% staggering gains in the U.S. stock market this year – and Gartner estimates global AI spending will likely reach a whopping $1.5 billion (£1.1 billion) before the end of 2025.

OpenAI, which brought AI to the mainstream with ChatGPT in 2022, is at the center of a tangled web of closely scrutinized deals.

For example, last month it struck a $100 billion deal with chipmaker Nvidia, itself the world’s most valuable publicly traded company.

It expands on an existing investment that Nvidia already had in Mr. Altman’s company – with the hope that OpenAI will build data centers powered by Nvidia’s advanced chips.

On Monday, OpenAI announced plans to buy equipment to develop AI worth billions of dollars from AMD, its Nvidia rival, in a deal that could make it one of AMD’s largest shareholders.

Please remember that this is a private company, although recently valued at half a trillion dollars.

Then there is tech giant Microsoft, which has invested heavily, and cloud computing giant Oracle has also struck a $300 billion deal with OpenAI.

OpenAI Stargate Project in Abilene, Texas, funded with help from Oracle and Japanese conglomerate SoftBank and announced at the White House during President Donald Trump’s first week in office, is gaining momentum every few months.

And as for Nvidia, it owns a stake in AI startup CoreWeave – which provides OpenAI with some of its massive infrastructure needs.

And as these increasingly complex funding deals become more common, Silicon Valley experts say they could cloud perceptions of demand for AI.

Some people don’t mince their words either, calling these deals “circular financing” or even “vendor financing” – where a company invests in or lends to its own customers so that they can continue to make purchases.

“Yes, investment lending is unprecedented,” Mr. Altman told me on Monday.

But, he added, “it’s also unprecedented that companies are growing revenue this quickly.”

OpenAI’s revenue is growing rapidly, but it has never turned a profit.

And it’s not a good sign that people I’ve spoken with keep bringing up Nortel — the Canadian telecommunications equipment maker that has borrowed prolifically to help finance deals for its customers (and thus artificially stimulate demand for its products).

For his part, Nvidia’s Jensen Huang defended his deal with OpenAI on CNBC Monday, saying the company wasn’t obligated to buy his company’s technology with the money he’s investing.

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

“There is no exclusivity. Our main goal is just to support them and help them grow – and grow the ecosystem.”

Mr. Kaplan says he sees There are some telling signs that the AI ​​sector – and therefore the economy as a whole – could be in trouble.

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

Meanwhile, retail investors are clamoring to get in on the startup action.

AMD’s stock rise this week could indicate that investors are trying to get a piece of the ChatGPT wealth machine – and while all this is happening, real physical infrastructure aimed at satisfying the seemingly insatiable thirst for increased AI development is being built.

“We are creating a new human-made ecological disaster: huge data centers in remote places like deserts that will rust and release harmful elements into the environment, with no one left to account because the builders and investors will be long gone,” Mr. Kaplan said.

But even though we’re in a bubble, Silicon Valley hopes that investments made now won’t necessarily be in vain.

“What comforts me is that the Internet was built on the ashes of yesterday’s overinvestment in telecommunications infrastructure,” said Jeff Boudier, who develops products at the Hugging Face AI community center.

“If there is overinvestment in infrastructure for AI workloads, it can lead to financial risks,” he said.

“But it’s going to create a lot of great new products and experiences, including ones we don’t think about today.”

Many believers believe in the potential of AI to transform society.

The question is whether the money needed to finance the ambitions of the sector’s biggest companies risks drying up.

“Nvidia looks like the last lender or investor,” said Rihard Jarc, founder of the UncoverAlpha newsletter.

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