Friday, October 24, 2025

Tech Giants' AI Investment Web Raises Bubble Concerns


Circular Funding Patterns Echo Dot-Com Era

Complex financial relationships between chipmakers, cloud providers, and AI startups draw scrutiny from analysts and regulators

A trillion-dollar artificial intelligence boom is being fueled by an increasingly complex web of circular financing arrangements among tech giants, raising concerns that the AI sector may be experiencing a dangerous bubble reminiscent of the dot-com crash, according to recent analyses and regulatory reports.

The concern centers on a pattern of interconnected deals where companies invest in their own customers, who then use that capital to purchase products and services from their investors. Nvidia's announcement in late September that it would invest up to $100 billion in OpenAI to help fund massive data center buildouts, with OpenAI in turn committing to purchase millions of Nvidia chips, has become the most prominent example.


The Circular Funding Web

OpenAI has racked up approximately $1 trillion worth of AI deals this year alone, including a $300 billion cloud infrastructure agreement with Oracle over five years, a $10 billion custom-chip partnership with Broadcom, and the massive Nvidia arrangement. Days after the Nvidia announcement, OpenAI struck a similar multibillion-dollar deal with AMD to deploy tens of billions of dollars worth of chips, with OpenAI potentially acquiring a significant stake in AMD.

The relationships extend beyond OpenAI. Nvidia has struck a $6.3 billion deal with AI data center firm CoreWeave, a customer in which it holds a 7% equity stake, and has made a reported $2 billion investment linked to its customer xAI.

Amazon has invested $8 billion in Anthropic, more than double Google's $3 billion in equity, with AWS serving as Anthropic's primary cloud provider and training partner through its Project Rainier supercomputer built on Amazon's Trainium 2 chips. Just this week, Anthropic announced plans to expand its use of Google Cloud technologies, including up to one million TPUs in a deal worth tens of billions of dollars expected to bring over a gigawatt of capacity online in 2026.

Microsoft has committed approximately $13-14 billion to OpenAI, securing a 49% profit share and positioning Azure as the exclusive cloud provider. In March 2025, OpenAI closed a historic $40 billion funding round led by SoftBank—the largest private tech deal on record—with $18 billion earmarked for the Stargate Project, a $500 billion AI infrastructure initiative involving SoftBank, OpenAI, and Oracle.

Echoes of Past Bubbles

Analysts have drawn comparisons to revenue "roundtripping" during the late 1990s tech bubble, when companies like fiber-optic giant Global Crossing engaged in deals where they paid money to another company for services, and that company agreed to purchase equipment of exactly equal value. When the bubble burst, Global Crossing went bankrupt.

Some analysts point to similarities with Cisco's vendor financing during the dot-com bubble, in which Cisco would finance dot-com companies' purchases of its equipment and services—an arrangement that ended disastrously.

"It's the levering up that's the truly unhealthy behavior," said Gil Luria, DA Davidson analyst, noting that AI companies like OpenAI and CoreWeave have taken on more debt or announced intentions to do so while receiving investments from Nvidia. Epistrophy Capital Research chief market strategist Cory Johnson added: "If your customer has to borrow money to buy your product, your customer's not a good customer".

Legendary short seller Jim Chanos, who predicted Enron's fall, questioned the pattern: "Don't you think it's a bit odd that when the narrative is 'demand for compute is infinite', the sellers keep subsidizing the buyers?"

The Scale of AI Investment

AI venture funding surged to $80 billion in Q1 2025, with 46% of VC capital flowing to AI startups despite representing only 18% of funded companies. AI startups now trade at 3.2 times higher valuations than traditional tech companies, with generative AI platforms reaching 45x revenue multiples despite 95% reporting no measurable financial returns.

More than 1,300 AI startups now have valuations exceeding $100 million, with 498 AI "unicorns" valued at $1 billion or more, according to CB Insights. Total global AI spending is expected to hit $375 billion this year and reach $500 billion in 2026, according to UBS.

Jason Furman estimates that almost all the economic growth in the US this year has arisen from investment in IT and related sectors.

Data Center Frenzy

The investment boom has triggered a massive buildout of AI-specific data centers. CoreWeave announced plans to invest over $6 billion to develop a large-scale data center in Pennsylvania with initial capacity of 100 megawatts, expandable to 300 megawatts. Applied Digital entered into approximately 15-year lease agreements with CoreWeave worth an anticipated $7 billion in total revenue.

CoreWeave exited Q2 2025 with more than $10 billion in debt on its balance sheet, adding $1.8 billion in senior notes and $2.6 billion in secured debt financing in July to finance its expansion.

Regulatory Scrutiny

The Federal Trade Commission issued a staff report in January 2025 examining partnerships between the largest cloud service providers—Alphabet, Amazon, and Microsoft—and AI developers Anthropic and OpenAI, detailing more than $20 billion in cumulative financial investment.

"The FTC's report sheds light on how partnerships by big tech firms can create lock-in, deprive start-ups of key AI inputs, and reveal sensitive information that can undermine fair competition," said FTC Chair Lina M. Khan.

The report highlights concerns that these partnerships could impact access to computing resources and engineering talent, increase switching costs for AI developers, and give cloud providers access to sensitive technical and business information unavailable to others.

Defenders Push Back

Not everyone sees cause for alarm. UBS analysts noted that the OpenAI-Nvidia arrangement represents up to 13% of Nvidia's projected 2026 revenue, and investments are contingent on actual progress in AI monetization—a performance-based approach that contrasts with the fixed commitments seen during the telecom bubble.

The "Big 4" tech firms are collectively expected to generate $203 billion in free cash flow after capital expenditures in 2025, indicating considerable investment capacity and far more sustainable funding than in previous cycles, UBS noted.

"The largest tech companies in the world are purchasing this infrastructure because they have demand," CoreWeave CEO Mike Intrator told CNBC. "There's nothing circular about that".

Max Kettner, chief multi-asset strategist at HSBC, dismissed concerns: "That's the nature of business," noting that companies have spent money on businesses that are also their customers for years.

Warning Signs

Several concerning patterns have emerged beyond the circular deals themselves. OpenAI expected about $5 billion in operating losses on $3.7 billion in revenue last year and is still losing money. Ben Inker of GMO noted that "this entire ecosystem has kind of run out of the capital from the cash flow of the hyperscalers, who have been funding things so far, and now needs to be funded by debt and these very strange deals".

Bain & Company warns that global AI capital spending may outpace potential revenue by hundreds of billions of dollars by 2030, with AI companies potentially needing $2 trillion in annual revenue to fund projected infrastructure demands—an $800 billion shortfall.

Economist Jon Danielsson cautioned that "circular funding loops imply that the same capital appears several times on different balance sheets, creating hidden fragility and misleading investors, creditors and regulators".

The Path Forward

Experts note that innovation-driven bubbles can yield real benefits when financed by equity rather than debt, and actual danger emerges when bank lending joins the funding cycle. History shows that periods of major innovation—railways in the 1840s, electricity in the 1890s, the internet in the late 1990s—often coincide with speculative booms generating spectacular profits and losses.

While acknowledging risks, strategists note that concerns about AI infrastructure overbuild are "not a problem that will materialize over the next six to 12 months".

The question remains whether the current AI boom represents a sustainable technological revolution or a financial bubble propped up by circular arrangements. As Georgetown University professor James Angel noted: "You never really know until afterwards whether today's prices were justified by the future cash flows of these companies or whether investors were overly exuberant".

Sources

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Tech Giants' AI Investment Web Raises Bubble Concerns

Circular Funding Patterns Echo Dot-Com Era Complex financial relationships between chipmakers, cloud providers, and AI startups draw scru...