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Nvidia ‘s $100 billion mega investment in OpenAI was hailed as a sign of artificial intelligence’s momentum as the chipmaker’s rally continued to boost the broader stock market to a record, but seasoned investors said the move looked more like a troubling echo of past bubbles. The chipmaker said it will invest up to $100 billion in OpenAI as the AI lab sets out to build hundreds of billions of dollars in data centers based around Nvidia’s AI processors. Nvidia shares jumped nearly 4% on Monday following the announcement, lifting the S & P 500 to another all-time high. However, some warn that the partnership fits the definition of vendor financing — Nvidia giving OpenAI money so OpenAI can turn around and spend it on Nvidia chips — and investors shouldn’t celebrate. “OpenAI is now selling itself off to a supplier in order to fund its investments. Phrased differently, NVDA is purchasing a stake in a customer in order to assure future revenue,” Bespoke Investment Group wrote in a note to clients Tuesday. “You don’t have to be a skeptic about AI technology’s promise in general to see this announcement as a troubling signal about how self-referential the entire space has become. If NVDA has to provide the capital that becomes its revenues in order to maintain growth, the whole ecosystem may be unsustainable,” Bespoke added. NVDA YTD mountain Nvidia year to date Famed short seller Jim Chanos raised a red flag on Nvidia CEO Jensen Huang’s estimate that building one gigawatt of data center capacity costs between $50 billion and $60 billion, of which about $35 billion is for Nvidia chips and systems. “Jensen’s estimate that a 1GW AI factory will cost $20-30B BEFORE GPU costs, is well above what many AI data center companies currently are telling investors their costs will be,” Chanos said in a post on X Monday. He also pointed out the last sentence of the press release from the companies, signing a deal that is not yet complete. This is similar to the memorandums of understanding (MOUs) that were hatched between internet companies at the Dotcom bubble top. “Nvidia and OpenAI look forward to finalizing the details of this new phase of strategic partnership in the coming weeks,” the statement said. Dotcom bubble echoes: Lucent, Nortel The practice of vendor financing helped fuel and then unravel the Dotcom bubble in the late 1990s and early 2000s. Telecom equipment makers such as Lucent Technologies, which were desperate to keep sales growth alive, extended billions in loans to smaller telecom carriers, like Winstar Communications, so those firms could buy Lucent’s own gear. On paper, Lucent booked booming revenues, but in reality, it was lending customers the money to pay for its products. “Another vendor financing deal in the AI space between Nvidia and Open AI has the names Lucent and Nortel ringing in my ear from the days when they announced similar deals with customers in the late 1990’s except the ones being announced now are so much bigger in terms of dollars,” Peter Boockvar, chief investment officer of One Point BFG Wealth Partners, said in a note to clients. The market has been focused on the upside, with Nvidia shares up more than 220% since the March 2023 lows. “For this whole massive experiment to work without causing large losses, Open AI and its peers now have got to generate huge revenues and profits to pay for all the obligations they are signing up for and at the same time provide a return to its investors,” Boockvar said. Nvidia shares were pulling back on Tuesday with more investors starting to rethink what this deal means. Nvidia was off by more than 2%. Oracle, the hottest AI play of the moment because of its recent exuberant AI sales forecast, was 4% lower.
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