Who’s paying whom? The circular money machine behind the AI boom (or bubble)
What’s not clear is how much of this AI boom is being driven by real, end-user demand — and how much might be a bubble.
In the world of artificial intelligence, a unique financing method known as circular financing has emerged. This method involves a chip supplier investing in a customer, such as a data centre builder, who then spends the money on the supplier's chips. Both companies then report growth, creating a seemingly endless cycle of financial support. Companies like Microsoft, Amazon, Google, and Nvidia have adopted this approach, with Nvidia being a central figure in the AI boom.
Nvidia's CEO, Jensen Huang, and OpenAI's president, Greg Brockman, recently spoke at the White House, highlighting the company's significant involvement in the AI sector. Nvidia has invested heavily in OpenAI, pledging $30 billion in a private funding round and guaranteeing up to $105 billion for an OpenAI data centre in Ohio. Nvidia has also invested in other AI firms, including Anthropic and CoreWeave, totaling over $50 deals in 2024 alone.
One example of this circular financing is the Australian data centre builder Firmus. Nvidia acted as the investor, supplier, and customer for Firmus, financing the construction of data centres using Nvidia's DSX AI factory platform. Firmus, in turn, signed Nvidia as a customer for its data centre in Batam, Indonesia, worth up to $30 billion over six years. OpenAI, with its existing relationship with Nvidia, has also been named as an anchor customer at Firmus's Malaysian data centres.
While this circular financing helps the AI build-out move faster, it also concentrates risk. If trouble arises at one firm, it can quickly spread to others in the AI sector. Additionally, the opaque nature of these deals makes it difficult to accurately value the companies involved. The Reserve Bank of Australia has warned about the potential for an AI bubble, citing the opaque and circular funding arrangements as a possible trigger.
Nearly 90% of Australian households are exposed to AI stocks due to their presence in US shares held through superannuation funds.
The timing of the AI boom remains uncertain. Companies like Nvidia, OpenAI, and Firmus are betting that future revenue from users and businesses will grow fast enough to pay for their massive data centre investments. However, the newest AI chips have a relatively short shelf life, and if the expected revenue and demand do not materialize, shareholders and super funds could face significant losses.
The comparison to the 1990s telecom boom serves as a reminder that although the AI boom may not be fake, its timing and potential for a bubble are cause for concern.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
