A tangled web of deals raises fears of an AI bubble in Silicon Valley

At OpenAI’s DevDay This week, Sam Altman, head of OpenAI, did what American tech heads rarely do these days: He actually answered reporters’ questions.

“I know it’s tempting to write a bubble story,” Mr. Altman told me, sitting surrounded by his senior aides. “In fact, there are a lot of parts of AI that I think are kind of bubbly right now.”

In Silicon Valley, the debate over whether AI companies are overvalued has taken on new urgency.

Skeptics privately – and some now openly – wonder 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 are concerns that the value of these companies is overvalued.

Altman said he expects investors will make some bad decisions and that silly startups will walk away with crazy money.

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

Not everyone is convinced.

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

Here, in what is often considered the technology capital of the world, concerns are growing.

At a panel discussion at Silicon Valley’s Computer History Museum this week, early AI entrepreneur Jerry Kaplan told a packed audience that he’s lived in four bubbles.

He’s especially concerned now given the amount of money on the table compared to the dot-com boom. There’s a lot to lose.

“When (the bubble) bursts, it will be very bad, and not just for people in AI,” he said.

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

However, at Stanford University’s Graduate School of Business, which has its fair share of tech entrepreneurs, Professor Anat Admati says that while there have been many attempts at modeling when we’re in a bubble, it can be a futile exercise.

“It is very difficult to determine the timing of the bubble,” Professor Admati told me. “And you can’t say for sure that you’ve been in one until after the bubble bursts.”

But the data worries many.

AI related companies has accounted for 80% Among the amazing gains achieved by the US stock market this year – according to Gartner estimates Global spending on artificial intelligence It is likely to reach $1.5 trillion (£1.1 trillion) before the end of 2025.

OpenAI, which brought AI into the consumer mainstream with ChatGPT in 2022, is at the center of a tangled web of deals that demand scrutiny.

For example – last month, it closed a $100 billion deal with chipmaker Nvidia, which itself is the most valuable publicly traded company in the world.

It expands Nvidia’s already existing investment in Mr. Altman’s company — with expectations that OpenAI will build data centers powered by advanced Nvidia chips.

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

Remember that this is a private company, albeit one Its value was recently estimated at half a trillion dollars.

Then there’s tech giant Microsoft, which is investing heavily, and cloud computing giant Oracle has a $300 billion deal with OpenAI as well.

Obinay Stargate project in Abilene, Texas, which was financed with help from Oracle and Japanese conglomerate SoftBank and which was announced at the White House during President Donald Trump’s first week in office, is growing larger every few months.

As for Nvidia, it owns a stake in AI startup CoreWeave, which supplies OpenAI with some of its massive infrastructure needs.

As these complex financing arrangements become more common, experts here in Silicon Valley say they may cloud perceptions of demand for artificial intelligence.

Some people don’t mince their words about this either, calling the deals “revolving financing” or even “seller financing” — where a company invests in or lends to its customers so they can continue to make purchases.

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

But he added that “it is also unprecedented for corporate revenues to grow so quickly.”

OpenAI’s revenues are growing rapidly, but it has never been profitable.

And it’s not a good sign that people I’ve talked to keep talking about Nortel — a Canadian telecommunications equipment maker that has borrowed heavily to help finance deals for its customers (and thus artificially boost demand for its goods).

For his part, Nvidia’s Jensen Huang defended his deal with OpenAI on CNBC on Monday, saying the company was not required to buy his company’s technology with the money he invested.

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

“There are no exclusives. Our primary goal is to support them and help them grow – and grow the ecosystem.”

Mr. Kaplan says he sees There are some clear signs that the AI ​​sector – and by extension the wider economy – may be in trouble.

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

At the same time, retail investors are demanding participation in the start-up process.

The rise in AMD shares 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 is being built aimed at satisfying a seemingly insatiable hunger for further AI development.

“We are creating a new man-made environmental disaster: massive data centers in remote places like deserts, which will rust and leach bad things into the environment, with no one left to hold them accountable because the builders and investors will be long gone,” Kaplan said.

But even if we are in a bubble, the hope in Silicon Valley is that the investments being made now will not necessarily go to waste.

“The thing that comforts me is that the Internet was built on the ashes of yesterday’s overinvestment in communications infrastructure,” said Jeff Buder, who builds products at AI Community Center Hugging Face.

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

“But it will enable a lot of great new products and experiences, including ones we don’t think about today.”

There are many believers in the ability of artificial intelligence to change society.

The question is whether The funds needed to finance the ambitions of leading companies in this sector may dry up.

“Nvidia seems to be the lender or investor of last resort,” said Rehard Jarke, who founded the UncoverAlpha newsletter.

“Who now has the ability to invest $100 billion in another company?”