Circular AI Chip Deals: A New Trend or Cause for Concern?

Circular Deals: A New Trend in AI Chips

The semiconductor industry is witnessing an unusual trend: circular deals. These arrangements, where funds flow between companies, are drawing attention from investors and analysts. While these deals may seem concerning, experts suggest they could be a strategic move in the growing AI market.

Circular deals involve money and resources circulating between two or more companies. For example, Nvidia's partnership with OpenAI involves a $100 billion investment by Nvidia. OpenAI is expected to use these funds to purchase Nvidia products, potentially creating a cycle where profits are reinvested back into OpenAI.

Another notable example is Nvidia's partnership with CoreWeave. CoreWeave used Nvidia GPUs as collateral for debt, while Nvidia owns shares in CoreWeave and utilizes its excess capacity. This arrangement could enable CoreWeave to expand its data center business, further increasing its reliance on Nvidia GPUs.

AMD's Role in the Circular Deal Landscape

OpenAI has also established a partnership with Advanced Micro Devices (AMD). Under this deal, OpenAI will receive warrants in AMD’s common shares if certain milestones are met. While this deal is less circular than others, it still creates a tighter relationship between the two companies.

However, this arrangement does not necessarily mean that OpenAI will use any gains from AMD stock to purchase more AMD GPUs. This distinction is important for investors who are monitoring the potential risks associated with circular deals.

Investor Concerns and Historical Parallels

These types of deals are raising concerns among investors, who recall the dot-com era when vendor financing and circular deals were common. The dot-com bubble eventually burst, leaving investors wary of similar practices today. However, the demand for AI is real and growing, which may justify these deals in the current market.

Nvidia's potential to push more GPUs into OpenAI to meet revenue targets is a concern, but experts believe this is unlikely. Such short-term tactics often backfire, and Nvidia does not have significant ownership in OpenAI, reducing this risk. Similar risks exist with Nvidia and CoreWeave, but Nvidia's responsibility for excess capacity at CoreWeave discourages aggressive tactics.

The Future of Circular Deals in AI

Despite the concerns, these deals appear to be legitimate transactions for now. OpenAI and CoreWeave need to invest heavily in Nvidia gear, and Nvidia has significant cash and valuable insight into AI innovation. These partnerships could be wise investments if OpenAI and CoreWeave achieve their ambitious goals.

Nvidia’s investments transform one-way deals into circular ones, which could be beneficial if OpenAI succeeds in its AI initiatives. While OpenAI is not obligated to reinvest Nvidia's funds into AI gear, it is likely to do so. Nvidia's investments in CoreWeave have also been successful so far, indicating potential long-term benefits.

In conclusion, circular deals in the AI chip industry are a trend worth monitoring. While they raise valid concerns, they may also reflect strategic investments in a growing market. Investors should remain cautious but recognize the potential benefits of these arrangements.