'Circular' mega-deals by Bay Area tech giants are raising eyebrows

The incredibly vast sums of cash that Bay Area executives are now willing to throw into artificial intelligence tech have created an eyebrow-raising trend: the “circular” mega-deal.

Take San Francisco’s OpenAI, which is staking its claim at the center of the nascent AI industry with a flurry of recent deals. Over the past month, it has roped in chipmaking juggernauts like Santa Clara’s Nvidia and Advanced Micro Devices, as well as data center giant Oracle and upstart CoreWeave. 

The deals are so vast that they defy comprehension — the Financial Times put the company’s recent commitments at north of $1 trillion – and they’re making public companies’ stock prices jump. Stock analysts dub some of these agreements “circular,” because investment money is flowing between companies that also buy from or sell to one another. The worry then is that such deals might prop up or overhype a bad business.

Here’s one indicatively tangled pathway through the morass of companies. Nvidia is investing billions in and selling chips to OpenAI, which is also buying chips from and earning stock in AMD. AMD sells processors to Oracle, which is building data centers with OpenAI — which also gets data center work from CoreWeave. And that company is partially owned by, yes, Nvidia. Taken together, it’s a doozy. There are other collaborations and rivalries and many other factors at play, but OpenAI is the many-tentacled octopus in the middle, spinning its achievement of ChatGPT into a blitz of speculative investments.

“We are in a phase of the build-out where the entire industry’s got to come together and everybody’s going to do super well,” OpenAI CEO Sam Altman told the Wall Street Journal on Monday. “You’ll see this on chips. You’ll see this on data centers. You’ll see this lower down the supply chain.”

Two deals in particular have garnered attention and sparked fresh worry about an AI bubble. Nvidia and OpenAI, in September, announced that Nvidia will invest up to $100 billion in OpenAI while the smaller company pays much more than that to get 10 gigawatts of Nvidia’s chips, meaning so many that they’ll require 10 gigawatts of energy to run — about five times the energy production of California’s Diablo Canyon Power Plant. Nvidia’s investment helps out OpenAI by giving it a larger war chest for spending, just as OpenAI’s chip purchase affirms it as a key Nvidia customer. Some worry that the more closely companies intertwine, the more susceptible they are to creating a bubble, or a market not actually supported by real consumer demand.

“You don’t have to be a skeptic about AI technology’s promise in general to see this announcement as a troubling signal about how self-referential the entire space has become,” Bespoke Investment Group wrote in a note to clients, per CNBC. “If NVDA has to provide the capital that becomes its revenues in order to maintain growth, the whole ecosystem may be unsustainable.”

Bloomberg also reported a couple of analyst notes. Stacy Rasgon wrote, “The action will clearly fuel ‘circular’ concerns.” Jay Goldberg put it more bluntly: “It’s kind of like having your parents co-sign on your first mortgage.”

Investor Brad Gerstner, on an episode of his podcast after the announcement, asked Nvidia CEO Jensen Huang how he responds to analysts “hyperventilating about circular revenues or about round-tripping.”

Huang shrugged away the worries, saying that the $400 billion OpenAI might be spending on Nvidia chips will come from revenues, equity and debt — “That’s their company, it’s not my business.” He also dismissed the idea that Nvidia money will just circle back to Nvidia, saying, “the investment side of it is not tied to anything” and “[OpenAI] is likely going to be the next multitrillion-dollar hyperscale company, and who doesn’t want to be an investor in that?”

The other major deal kicking off currents of skepticism arrived on Monday. OpenAI and AMD announced that the chipmaker would provide 6 gigawatts of AI chips, for an undisclosed price, while OpenAI would get millions of AMD shares on the stock market as it deploys the chips. Again, it’s an unusual deal. AMD is selling OpenAI both its chips and itself.

Also, even with Nvidia’s investment, AMD’s shares and OpenAI’s repeated fundraises, the ChatGPT-maker doesn’t have the cash to meet all of these vast commitments. And if OpenAI’s soaring projections about demand for AI computing don’t bear out, there will be a lot of committed money — and a large share of the stock market — that would see its foundations topple.

Most aren’t so worried. AMD’s stock soared on its OpenAI deal, just as Nvidia’s had on its deal. Analyst Brian Colello wrote Monday that though “anyone scarred by the dot-com bubble bursting is keenly aware of the risks of a circular deal in which firms pass funds back and forth to prop up a business,” his company is “not yet alarmed by them.”

Another tech analyst, Gil Luria, delivered a more cynical take on the new deals, per the Financial Times: “Part of Silicon Valley’s ‘fake it until you make it’ ethos is to get people to have skin in the game. Now a lot of big companies have a lot of skin in the game on OpenAI.”

Work at a Bay Area tech company and want to talk? Contact tech reporter Stephen Council securely at stephen.council@sfgate.com or on Signal at 628-204-5452.