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

The artificial intelligence boom is fueled by a few key companies that are increasingly reliant on each other. These partnerships involve massive amounts of capital and computing power, which drives rapid growth.

But some analysts are warning this insular web of deals could create a mirage of growth and hide underlying risks.

Nvidia plans to invest in OpenAI, which buys cloud computing from Oracle. Oracle, in turn, purchases chips from Nvidia, which has a stake in CoreWeave. CoreWeave provides AI infrastructure to OpenAI, creating a complex loop.

These deals have boosted company values and propelled U.S. stock indexes to new highs, but some experts are concerned.

Oxford Economics analysts warn that the scale of tech firm investments indicates significant risks. A correction in tech stocks could occur if AI productivity gains are limited or delayed, which would negatively affect the real economy.

A recent example of this network is OpenAI's deal with AMD. OpenAI will buy AMD's chips in exchange for a stake of up to 10% in the semiconductor company.

This announcement came shortly after Nvidia pledged to invest up to $100 billion in OpenAI. Interestingly, AMD and Nvidia are direct competitors in the chip market.

Nvidia's CEO, Jensen Huang, sees his company's OpenAI investment as an opportunity to invest in a future "multitrillion-dollar" company. Nvidia's market valuation is already at $4.5 trillion.

Nvidia and OpenAI already collaborate indirectly through CoreWeave, a cloud-computing company. CoreWeave sells Nvidia systems to OpenAI, and Nvidia is one of CoreWeave's biggest investors.

Oracle plans to spend about $40 billion on Nvidia's chips to power an OpenAI data center. Oracle and OpenAI are also working with SoftBank on a $500 billion project called Stargate for additional data centers, with Nvidia as a key technology partner.

Some investment advisors find the Nvidia-OpenAI deal reminiscent of those before the 2000 dot-com bubble burst. The tech-heavy Nasdaq Composite index fell 77% in March 2000, wiping out billions in market value.

D.A. Davidson financial group's Gil Luria notes that the unhealthy part of the AI ecosystem is marked by "related-party transactions." These transactions can artificially inflate the value of the companies involved.

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.

Despite concerns, investors remain focused on the potential for near-term returns. Many are prioritizing rapid growth and sufficient profit to justify the massive investments.

OnePoint BFG Wealth Partners' Peter Boockvar emphasizes the need for huge revenues and profits to cover obligations and provide returns to investors. Otherwise, this could be a problem.

Currently, seven tech companies, known as the "Magnificent Seven," account for over 35% of the S&P 500's market value. These companies—Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla—are all heavily invested in AI projects.