Analysts ask 'circular financing' questions as Nvidia invests $100 billion in OpenAI

Nvidia announced Monday it will put up to $100 billion into OpenAI, the company behind ChatGPT, sparking fresh debate about whether the artificial intelligence industry has grown too hot, way too fast.

According to an earlier Cryptopolitan report, the massive investment will help OpenAI expand its network of data centers filled with Nvidia’s specialized computer chips. However, market watchers are raising red flags about what they call “circular” financing, where Nvidia invests money in companies that then spend those same dollars buying Nvidia goods.

“The action will clearly fuel ‘circular’ concerns,” wrote Stacy Rasgon, who studies tech companies for Bernstein Research, in a note to investors after the deal became public.

This worry has shadowed Nvidia throughout the AI rise that started three years ago. Last year alone, the chip company backed over 50 different AI startups through investment deals, according to PitchBook data.

The company looks set to beat that record this year. Many of these funded companies later purchased Nvidia’s costly graphics processing units with the investment money they received.

However, this OpenAI deal stands apart from all previous investments. “It appears to dwarf all the others,” Rasgon noted. The sheer size will “likely fuel these worries much hotter than what we have seen previously, and raise concerns over the rationale behind the action.”

OpenAI will be leasing Nvidia processors

Nvidia has stated that OpenAI cannot use the investment money for “direct purchases” of Nvidia goods, according to Rasgon’s research note.

Both companies said Monday they are still working out some parts in the agreement. OpenAI intends to lease Nvidia’s AI processors rather than buy them outright, according to executives working on the deal. They also mentioned that predicting how quickly AI chips lose their value over time remains challenging.

Other major technology companies have made similar moves. Amazon.com Inc. and Microsoft Corp. have both invested in leading AI startups to boost business for their cloud computing services. But Nvidia holds a special position in the AI world by controlling the advanced chip market needed to train the most sophisticated AI systems. This dominance has made the company the biggest winner from the AI excitement so far.

The partnership comes during a time of growing uncertainty in the industry. A large number of people, both inside and outside the tech world, now worry about an AI bubble that could burst like the dot-com crash 25 years ago.

Even OpenAI CEO Sam Altman has suggested that some AI startup valuations might not make financial sense. Still, he maintains his belief in AI’s long-term promise and says the industry needs to spend “trillions” on supporting infrastructure.

A costly shift in the AI industry exposed

For OpenAI, which currently loses money, partnering with the world’s most valuable company could open doors to funding and computing power it cannot secure alone.

“It’s kind of like having your parents co-sign on your first mortgage,” explained Jay Goldberg, Seaport Global analyst who has given Nvidia stock a rare sell rating.

Goldberg also sees signs of circular financing in the deal and believes it shows “bubble-like behavior” in the market.

“When times are good, this is going to make things better. We’re going to grow faster; numbers are going to go up much faster,” he said. “But when the cycle turns, and it will turn, it makes things worse on the downside.”

The deal highlights how the AI industry has reached a more expensive phase of development. Building the data centers and buying the specialized equipment needed for advanced AI systems requires enormous amounts of money that even successful companies like OpenAI struggle to raise independently.

If you're reading this, you’re already ahead. Stay there with our newsletter.