Circular AI Chip Deals: A New Trend or Cause for Concern?
Source: morningstar.com
A peculiar trend is emerging in the semiconductor world: circular deals. These arrangements, where funds flow between companies, are drawing attention. But should investors be worried? Probably not yet.
Understanding Circular Deals
These deals involve money and resources circulating between two or more companies. A prime example is Nvidia's partnership with OpenAI. Nvidia may invest up to $100 billion in OpenAI. OpenAI will likely use those funds to purchase Nvidia products. Nvidia could then reinvest those profits back into OpenAI.
Another example is Nvidia's partnership with CoreWeave. CoreWeave used Nvidia GPUs as collateral for debt. Nvidia also owns shares in CoreWeave and will use CoreWeave's excess capacity. This could let CoreWeave expand its data center business, buying even more GPUs from Nvidia.
AMD Enters the Fray
OpenAI also has a partnership with Advanced Micro Devices (AMD). OpenAI will receive warrants in AMD’s common shares if certain milestones are met. This deal is less circular. OpenAI may not use any gains from AMD stock to buy more AMD GPUs. Still, it does create a tighter relationship.
Investor Concerns
These types of deals are raising eyebrows. Nvidia might push more GPUs into OpenAI to meet revenue targets. However, this isn't likely today, nor is it expected in the future. Such short-term tactics tend to backfire. This risk would be more concerning if Nvidia had significant ownership in OpenAI.
Similar risks exist with Nvidia and CoreWeave. Nvidia could conceivably push GPUs onto CoreWeave. However, Nvidia is responsible for any excess capacity at CoreWeave, discouraging this scenario. Still, the companies have a close partnership.
Echoes of the Dot-Com Era
Investors remember the dot-com era. Vendor financing and circular deals were common then. The dot-com bubble burst, and investors are wary of firms propping up businesses by passing funds back and forth. The demand for AI is real and growing, but this situation warrants monitoring.
A New Era of Investment
For now, these deals appear to be legitimate transactions. OpenAI and CoreWeave need to invest heavily in Nvidia gear. Nvidia now has significant cash and valuable insight into AI innovation. OpenAI and CoreWeave are attractive investments, and Nvidia could do far worse with its capital.
Nvidia’s investments transform one-way deals into circular ones. This approach could be wise if OpenAI achieves its ambitious goals. While OpenAI isn't obligated to reinvest Nvidia's funds into AI gear, it's likely to happen. Nvidia's investments in CoreWeave have also been successful so far.