🔗 Share this article

During financial expansions, there come moments where market commentators question whether exuberance has grown unreasonable.

Latest multi-billion dollar agreements between OpenAI with chip makers Nvidia along with AMD have raised questions regarding the sustainability behind massive investments in AI systems.

What Makes the Nvidia & AMD Agreements Worrying to Financial Watchers?

Some commentators voice concern regarding the reciprocal nature in these arrangements. Under the conditions for NVIDIA's agreement, OpenAI agrees to pay Nvidia with cash to acquire processors, while Nvidia commits to invest into OpenAI in exchange for minority stakes.

Leading UK tech backer James Anderson stated concern regarding similarities to vendor financing, wherein a company provides financial assistance to clients buying its products – a risky situation when those customers hold overly optimistic business projections.

Vendor financing was one of the characteristics of the late 1990s dot-com bubble.

"It's not exactly similar to what many telecom suppliers were up to during 1999-2000, yet there are certain similarities with that period. I don't think it leaves me feeling entirely comfortable in that perspective regarding this," commented Anderson.

Meanwhile, the AMD arrangement further enmeshes OpenAI with a second semiconductor manufacturer in addition to NVIDIA. Through this deal, OpenAI plans to utilize hundreds of thousands of AMD chips in their datacentres – the central nervous systems of AI tools including ChatGPT – and will have the option to purchase ten percent in AMD.

Everything of this is being driven by the thirst from OpenAI as well as its peers for as much computing power as possible to push their models to ever greater capability advancements – in addition to meet growing user needs.

Neil Wilson, UK market strategist at financial firm Saxo, remarked that deals such as the Nvidia & OpenAI collectively pointed to circumstances that "appears, smells and talks similar to an economic bubble."

What Are the Other Signs Pointing to a Bubble?

Anderson highlighted soaring valuations among prominent AI companies as another source of concern. OpenAI currently worth $500bn (£372bn), versus $157 billion last October, whereas Anthropic almost trebled its valuation recently, rising from $60 billion this past March up to $170bn last month.

Anderson stated how the scale of the valuation surges "did bother him." According to accounts, OpenAI reportedly posted revenue amounting to $4.3bn in the initial six months of this year, alongside an operating loss of $7.8 billion, as reported by technology news site The Information.

Recent share price swings additionally jolted experienced market observers. As an example, AMD briefly gained $80bn to its market cap throughout equity trading this past Monday following the OpenAI announcement, whereas Oracle – one profiting from need toward AI infrastructure like datacentres – added approximately $250 billion in one day in September after reporting stronger than anticipated results.

Additionally, there exists a huge investment spending boom, meaning spending for non-personnel costs such as buildings as well as equipment. The big four AI "hyperscalers" – Facebook owner Meta, Google owner Alphabet, Microsoft together with Amazon – are expected to spend $325bn on capex in the current year, roughly the GDP of Portugal.

Does Artificial Intelligence Implementation Warranting Market Enthusiasm?

Faith in artificial intelligence expansion suffered a setback in August when the Massachusetts Institute of Technology published research indicating that 95% of organizations receive zero return from money spent in AI generation tools. Their report said the problem lay not in the capabilities of AI systems but the manner in they were used.

The report indicated this represented a clear example of the "AI adoption gap", with new ventures led by 19- or 20-year-olds reporting significant increases in income through deploying AI technologies.

These findings coincided with a substantial decline among AI support shares including NVIDIA and Oracle. This happened 60 days after McKinsey & Company, the consulting firm, said that eight out of 10 businesses report using genAI, but an identical proportion indicate minimal effect on their bottom line.

McKinsey explained this is since AI tools are being used for broad applications like creating conference summaries rather than specific uses such as identifying problematic suppliers and generating concepts.

Everything here unnerves backers since an important promise by AI companies such as Alphabet, OpenAI & Microsoft remains how if you buy their tools, they will improve efficiency – a measure of economic efficiency – by helping an individual worker accomplish much more profitable output during an average business day.

However, we see additional clear indications of a widespread adoption toward AI. This week, OpenAI announced how ChatGPT is now accessed by 800 million people weekly, up from the number of 500 million mentioned by OpenAI last March. Sam Altman, OpenAI’s chief executive, strongly believes that demand for premium access to AI is going to persist in "sharply rise."

What Does the Bigger Picture Reveal?

Adrian Cox, a thematic strategist at Deutsche Bank's research division, says present circumstances feels like "we're at a pivotal point where signals show varying colors."

The red lights, he says, include massive investment spending wherein "existing versions of chips might become outdated before the investment yields returns" and the soaring valuations for private companies like OpenAI.

Cautionary indicators involve over double of the share prices belonging to the "magnificent seven" US tech companies. This is balanced through their P/E ratios – a measure determining if an investment stands under- or overvalued – which are under past averages