AI's Risky Game: Nvidia, OpenAI, and the Web of Intertwined Investments

AI’s Risky Game: Nvidia, OpenAI, and the Web of Intertwined Investments

The artificial intelligence (AI) boom is fueled by a few key companies increasingly reliant on each other, with partnerships involving massive capital and computing power. While these deals drive rapid growth, analysts warn they could create a mirage of success, hiding underlying risks in the intertwined AI ecosystem.

Nvidia’s plans to invest in OpenAI, which buys cloud computing from Oracle, exemplify this complex web. Oracle, in turn, purchases chips from Nvidia, which has a stake in CoreWeave. CoreWeave provides AI infrastructure to OpenAI, creating a loop that has boosted company values and propelled U.S. stock indexes to new highs. However, experts caution that this circular investing could lead to inflated valuations and systemic risks.

The Risk of Circular Investing

Oxford Economics analysts highlight the scale of tech firm investments as a significant concern. If AI productivity gains are limited or delayed, a correction in tech stocks could occur, negatively impacting the real economy. A recent example is OpenAI’s deal with AMD, where OpenAI will buy AMD’s chips in exchange for a stake of up to 10% in the semiconductor company. This deal underscores the interdependence among competitors and partners in the AI supply chain.

Nvidia’s CEO, Jensen Huang, views his company’s investment in OpenAI as an opportunity to back a future "multitrillion-dollar" company. Nvidia’s market valuation already stands at $4.5 trillion, reflecting investor optimism. However, the close ties between Nvidia, OpenAI, and other tech giants raise questions about the sustainability of this growth.

Indirect Collaborations and Competition

Nvidia and OpenAI already collaborate indirectly through CoreWeave, a cloud-computing company that sells Nvidia systems to OpenAI. Nvidia is one of CoreWeave’s biggest investors, further tightening the web of interconnected investments. Oracle plans to spend about $40 billion on Nvidia’s chips to power an OpenAI data center, while also working with SoftBank on a $500 billion project called Stargate for additional data centers, with Nvidia as a key technology partner.

These collaborations highlight the blurred lines between competition and cooperation in the AI industry. For instance, Nvidia and AMD are direct competitors in the chip market, yet their investments in OpenAI and other joint projects suggest a strategic alignment to dominate the AI landscape.

Echoes of the Dot-Com Bubble

Some investment advisors compare the current AI ecosystem to the period before the 2000 dot-com bubble burst. The tech-heavy Nasdaq Composite index fell 77% in March 2000, wiping out billions in market value. Gil Luria of D.A. Davidson financial group notes that the unhealthy aspect of the AI ecosystem is marked by "related-party transactions," which can artificially inflate company valuations.

Despite these concerns, investors remain focused on the potential for near-term returns. Many prioritize rapid growth and sufficient profit to justify the massive investments, even as experts warn of the risks associated with over-investment and underinvestment in the AI sector.

The Dominance of the Magnificent Seven

Currently, seven tech companies—known as the "Magnificent Seven"—account for over 35% of the S&P 500’s market value. These companies, including Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla, are all heavily invested in AI projects. Their dominance underscores the concentration of power and influence in the tech industry, raising questions about market stability and the potential for a correction.

Peter Boockvar of OnePoint BFG Wealth Partners emphasizes the need for huge revenues and profits to cover obligations and provide returns to investors. Otherwise, the intertwined investments and inflated valuations could pose significant risks to the broader economy.

Wall Street’s Perspective

OpenAI’s Sam Altman has sought to calm fears of an AI bust, calling it a normal part of industry cycles. He acknowledged that over-investment and underinvestment will lead to losses but expressed confidence in the long-term potential of AI. Despite the concerns, Wall Street remains bullish on the sector, with investors prioritizing rapid growth and near-term returns.

As the AI industry continues to evolve, the complex web of intertwined investments among Nvidia, OpenAI, and other tech giants will likely remain a key area of focus for analysts and investors alike. The balance between innovation, competition, and risk management will shape the future of this rapidly growing sector.