The artificial intelligence (AI) revolution, transforming how we live and work in Canada and globally, is increasingly powered by a small group of interconnected companies. These entities rely on each other for the massive capital and computing resources needed to fuel their rapid expansion. These partnerships, some valued at hundreds of billions of dollars, have significantly inflated company valuations, driving stock indexes to record highs.
However, this growing insularity in AI investment raises concerns that the flow of money between these companies could create a false impression of growth. Some analysts caution that if this trend continues, a single point of failure could jeopardize the entire industry, with serious repercussions for the Canadian and global economies.
Oxford Economics analysts recently noted that the scale of recent investment increases by tech firms suggests they are taking substantial risks, echoing concerns from the dot-com bubble burst over two decades ago. If AI productivity gains and return on investment are limited or delayed, a sharp correction in tech stocks, with negative consequences for the real economy, would be highly probable.
The Interconnected Web of AI Deals
A recent example of this intricate network is the partnership between OpenAI, the creator of ChatGPT, and Advanced Micro Devices (AMD), a chipmaker specializing in AI.
Under this agreement, OpenAI will purchase AMD's chips for an undisclosed sum, gaining the right to acquire up to a 10% stake in the semiconductor giant. This announcement followed Nvidia's pledge to invest up to $100 billion in OpenAI.
OpenAI CEO Sam Altman expressed his enthusiasm for the collaboration with AMD, stating that they would use AMD's chips to better serve their users. Notably, AMD and Nvidia are direct competitors in the AI chip market.
While an Nvidia spokesperson did not immediately comment on whether OpenAI funds would be used to purchase its competitor's chips, Nvidia CEO Jensen Huang has described his company's $100 billion investment in OpenAI as an opportunity to invest in the next "multitrillion-dollar" company. Nvidia itself boasts a market valuation of $4.5 trillion.
Huang explained that Nvidia's investments in companies like OpenAI are based on confidence in the company's ability to sustain revenues. Nvidia and OpenAI already have an indirect relationship through CoreWeave, a cloud-computing company with an agreement to sell Nvidia systems to OpenAI. Nvidia is also a major investor in CoreWeave.
Other key players include Oracle, which plans to invest approximately $40 billion in Nvidia's chips to power one of OpenAI's data centers. Oracle and OpenAI are also collaborating with Japan's SoftBank group on a $500 billion project called Stargate to build additional data centers. Nvidia is a key technology partner in the Stargate deal, and SoftBank holds a $3 billion stake in Nvidia.
An OpenAI representative referred to CFO Sarah Friar's recent comments about the company's need for additional computing power but did not directly address the circular nature of these investments. Nvidia and CoreWeave declined to comment, while representatives for Oracle and SoftBank did not respond to requests for comment.
Echoes of the Dot-Com Bubble
Some investment advisors find the Nvidia-OpenAI deal reminiscent of those made in the lead-up to the 2000 dot-com bubble burst, when the tech-heavy Nasdaq Composite stock index plummeted by 77%, wiping out billions of dollars in market value. It took 15 years for the Nasdaq to recover to its March 2000 highs.
Gil Luria, a managing director at D.A. Davidson financial group, believes that the AI ecosystem has both healthy and unhealthy aspects. The unhealthy aspect is characterized by related-party transactions that can artificially inflate the value of the companies involved. If investors perceive the ties among AI giants as too close, a "deflating activity" could occur, signaling a bubble burst.
Altman has attempted to allay fears of an impending AI bust, suggesting that it is a normal part of the industry's life cycle. He acknowledged that there will be booms and busts, with periods of over-investment and underinvestment.
The Allure of Massive Returns
Despite concerns about the insular web of AI deals and investments, the potential for near-term, substantial returns has overshadowed these worries. Many investors are more focused on whether companies can grow rapidly enough and generate sufficient profit to justify the massive investments being made.
Peter Boockvar, chief investment officer of OnePoint BFG Wealth Partners, emphasizes that OpenAI and its peers must generate huge revenues and profits to cover their obligations and provide a return to investors.
As long as tech-firm valuations continue to soar and investors continue to profit, Wall Street is incentivized to embrace the boom and disregard potential doomsday scenarios.
As of a recent Wednesday, the "Magnificent 7" tech companies (Apple, Google parent Alphabet, Amazon, Facebook parent Meta, Microsoft, Nvidia, and Tesla) accounted for over 35% of the market value of all companies in the S&P 500 Index, exceeding $20 trillion. Each of these companies is heavily invested in AI projects.
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